REPS Rules — Real Estate Professional Status

IRC §469(c)(7) · Two-part qualification test for non-passive rental losses

Test 1 of 2 — More Than 750 Hours Required

IRC §469(c)(7)(B)(ii)

Must exceed 750 hours

You must perform more than 750 hours of services during the tax year in real property trades or businesses in which you materially participate. Hours from any qualifying real property trade or business count — not just rentals.

Qualifying real property trades or businesses — §469(c)(7)(C)

✓Real property development

✓Real property redevelopment

✓Real property construction

✓Real property reconstruction

✓Real property acquisition

✓Real property conversion

✓Rental of real property

✓Operation of real property

✓Management of real property

✓Leasing of real property

✓Brokerage trade or business

Note: §469(c)(7)(C) lists eleven real property trades or businesses. Sale activities are generally treated under operation, management, or brokerage. Licensed brokerage hours follow §469(c)(7)(D)(ii) — see the 5% ownership rule below if you work as a W-2 employee.

⚠ 5% Ownership Rule — §469(c)(7)(D)(ii)

If you perform services in a real property trade or business as an employee, those hours do not count toward the 750-hour test unless you own 5% or more of the entity. This is the most common disqualifier for licensed real estate agents working under a brokerage they don't own.

Test 2 of 2 — 50% Personal Services Test

IRC §469(c)(7)(B)(i)

> 50% of all services must be RE

More than half of all personal services performed in all trades or businesses during the year must be in real property trades or businesses in which you materially participate.

💡 W-2 Employee Trap

If you have a full-time W-2 job (~2,000 hrs/yr), your RE hours must exceed 2,000+ to pass the 50% test. A spouse's W-2 does NOT count against you when filing jointly — only YOUR personal services are measured.

Material Participation in Each Rental Activity

IRC §469(c)(7)(A) + Temp. Reg. §1.469-5T

Passing both REPS tests is not enough on its own. You must also materially participate in each rental activity individually — or file a grouping election.

Test 1

More than 500 hours in the activity

Test 2

Substantially all participation

Test 3

More than 100 hours, not less than any other individual

Test 4

SPA aggregate: >100 hrs each (trade/business only), >500 hrs total

Test 5

5 of the last 10 years

Test 6

3 prior years (personal service activity — rarely applies to rentals)

Test 7

Facts & Circumstances: >100 hrs required, no paid manager, no one else does more management (§1.469-5T(b)(2)(ii)–(iii))

§469(c)(7)(A) Grouping Election

A REPS taxpayer may elect to treat all rental real estate interests as a single activity. This makes material participation much easier — all hours across all properties are combined. Must be filed on a timely filed return.

✓ Pros

Easier to meet material participation
Hours from all properties combined
Losses from one property can offset gains from others

⚠ Cons

Cannot be easily revoked once made
Disposing of one property doesn't trigger full suspended loss recognition
Must be made on a timely filed original return
If you missed the deadline, see Rev. Proc. 2011-34 for potential relief

Limits That Still Apply After Losses Are Non-Passive

Clearing the passive-activity rules under §469 is necessary but not the end of the analysis. Even fully non-passive rental losses can be limited:

§461(l) Excess Business Loss

The net business loss an individual can use against non-business income is capped each year (inflation-indexed). Any excess carries forward as a net operating loss.

§465 At-Risk Rules

Losses are deductible only up to the amount you have at risk in the activity — generally cash invested plus debt you are personally liable for.

Basis (§704(d) / §1366)

You cannot deduct losses beyond your basis in the property or pass-through interest. Excess carries forward until basis is restored.

§1411 Net Investment Income Tax

Materially participating can also remove rental income from the 3.8% NIIT — confirm with your tax professional based on your facts.

Top Audit Red Flags

⛔

No contemporaneous records

Courts have repeatedly rejected after-the-fact reconstructions. Log hours as they occur with specific descriptions of what was done.

⛔

Vague activity descriptions

"Managed property" is not enough. Record who you called, what was decided, what the outcome was, and how long it took.

⛔

Suspiciously round numbers

Claiming exactly 750 hours raises examiner scrutiny. Log actual time including minutes.

⚠

Non-RE hours not disclosed

Failing to account for W-2 or other business hours makes the 50% test unverifiable and indefensible.

⚠

Spouse hours mixed with taxpayer

Only the taxpayer's hours count for the 750-hr and 50% tests. Spouse hours are separate and must be logged distinctly.

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