Topic 03 · 6 min read
Real Estate Professional Status
The status that unlocks losses against a paycheck.
Normally, rental losses can only offset rental income. Real Estate Professional Status, or REPS, changes that. Qualify, and rental losses can be used against wages and business income instead of sitting on the shelf.
What to know
- The two hurdles
- More than half of all the personal services you perform during the year must be in real property trades or businesses, and you must spend more than 750 hours in them.
- Material participation
- REPS alone is not enough. Each rental also has to pass a material participation test — most commonly 500 hours on that activity, or being the person who does substantially all of the work.
- Grouping election
- Owners with several rentals often elect to treat them all as a single activity so the hours can be counted together.
- Spousal strategy
- The hour tests are met by one spouse individually — hours cannot be combined — but a couple filing jointly uses whichever spouse qualifies.
- Documentation
- A contemporaneous time log is the difference between winning and losing an audit. Reconstructed calendars rarely hold up.
The tax benefit
Rental losses become deductible against ordinary income such as W-2 wages, which can be worth tens of thousands in a single year for a high earner.
Worked example
Two incomes, one qualifier
One spouse works full time as a software engineer. The other manages the couple's six rentals for 1,200 hours a year and has no other job. The second spouse qualifies, and the rental losses can offset the engineer's salary on their joint return.
Watch out for
- A full-time job outside real estate makes the more-than-half test nearly impossible.
- REPS is a yearly determination; qualifying once does not lock it in.
- This is one of the most frequently audited positions in the code.
Terms from this topic
REPSMaterial participationGrouping election750 hours
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