What is real estate professional status and why does it matter?
IRS real estate professional status lets active investors deduct unlimited rental losses against W-2 income. Requires 750+ hours/year and 50%+ of working time in real estate.
IRS Real Estate Professional Status (REPS) is a tax classification that removes the passive activity loss limitation on rental property. Without REPS, rental losses are passive and can only offset passive income (other rental income, generally). Excess passive losses suspend until you sell or have offsetting passive income. With REPS, rental losses become non-passive and can offset W-2 income, business income, or any other ordinary income - effectively unlimited deduction. Two tests must both be met: (1) 750-hour test - more than 750 hours per year in real estate trades or businesses (acquiring, managing, leasing, brokering, etc.). (2) 50% test - more than half of your total working time is in real estate. Both tests must be met EVERY year you claim REPS - it is not a one-time election. For married couples filing jointly, only one spouse needs to qualify. Documentation matters: keep contemporaneous time logs, calendars, and project documentation. The IRS challenges REPS frequently in audit. Beyond REPS, "material participation" in your rentals (500-hour test on rental activities) is also required to deduct losses against ordinary income. REPS without material participation does not unlock the passive loss exception.
People also ask
Can a W-2 employee qualify for REPS?
Hard but possible. The 50% test requires more time in real estate than W-2 work, which typically means part-time or no W-2 employment. A spouse without W-2 income often qualifies for REPS while the other works full-time.
Does property management count toward 750 hours?
Yes. Acquiring, managing, leasing, brokering, and operating real estate all count. Hours spent investing passively (research only, no operational involvement) generally do not count.
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