Real Estate Professional Status (REPS)

Detailed Explanation

Real Estate Professional Status under IRC Section 469(c)(7) is the single most powerful tax lever for high-income real estate investors. It overrides the default rule that classifies rental real estate as a passive activity, lifting the $25,000 passive loss cap (which is itself fully phased out at $150K AGI). To qualify, a taxpayer must satisfy TWO tests: (1) more than half of personal services performed during the year are in real property trades or businesses, AND (2) more than 750 hours per year in real property trades or businesses in which the taxpayer materially participates. Real property trades or businesses include development, construction, acquisition, rental, management, leasing, and brokerage. A full-time W-2 job in another field generally disqualifies the taxpayer from the more-than-half test (because more time was spent on the W-2 than in real estate). For married couples filing jointly, only ONE spouse needs to qualify, which is why the structure is so common: one spouse holds the W-2 (high earner), the other spouse qualifies as a Real Estate Professional. Even after meeting REPS, the taxpayer must ALSO materially participate in each rental separately, OR file an aggregation election under Reg. §1.469-9(g) to treat all rental activities as a single activity for material participation purposes (must be filed timely with original return). Common audit issues: time logs that look reconstructed (made up at filing time), inflated hours (drive time, web browsing), failure to make the aggregation election, and W-2 employment competing with the more-than-half test. Documentation requires contemporaneous logs (calendar, app-based time tracking) showing dates, hours, and tasks.