How to Qualify for Real Estate Professional Status (REPS) and Maximize Tax Savings
6 Minute Read
Introduction
Real estate investors looking to significantly reduce their taxable income should explore the powerful benefits of qualifying for Real Estate Professional Status (REPS). This IRS designation allows investors to offset non-passive income with real estate losses—potentially resulting in substantial tax savings.
But the rules are strict, and qualification isn’t automatic. In this post, we’ll break down the IRS requirements, who qualifies, and how to document your activities to stay compliant and maximize your deductions.
What Is Real Estate Professional Status?
REPS is a classification defined by the IRS under IRC Section 469(c)(7) that allows certain taxpayers to treat rental real estate losses as non-passive, meaning they can be used to offset W-2 income, business income, and other forms of non-passive income.
Without REPS, rental losses are generally considered passive and can only offset other passive income.
Benefits of REPS
Offset W-2 or business income with real estate losses
Reduce taxable income and potentially fall into a lower tax bracket
Accelerate depreciation benefits using cost segregation and bonus depreciation
Minimize or eliminate tax liability in high-income years
Who Qualifies for REPS?
To qualify, both of the following conditions must be met during the tax year:
1. More Than Half of Personal Services
You must spend more than 50% of your total working hours in real property trades or businesses in which you materially participate. These include:
Development
Construction
Acquisition
Conversion
Rental or leasing
Operation or management
Brokerage
2. 750 Hours Rule
You must spend at least 750 hours of service during the year in real property trades or businesses in which you materially participate.
Important: W-2 work in another field can disqualify you if it exceeds your real estate hours.
What Counts as “Material Participation”?
The IRS provides seven tests for material participation. Most real estate professionals qualify under one of these:
You work 500 hours or more in the activity
Your participation is substantially all of the work done
You work more than 100 hours, and no one else works more
You meet any of the other material participation tests under IRS rules
We took a deep dive into these tests in our earlier blog post, “Material Participation Fundamentals” where we broke down what qualifies as material participation and how to meet the IRS standards. If you missed that post, it’s worth a read to better understand how your daily real estate activities translate into tax-saving opportunities.
Documentation is Key
The IRS is strict about recordkeeping. To defend your REPS claim, maintain:
Daily time logs detailing activities and hours worked (Swipe our free time log template here!)
Calendars with meetings, showings, travel, etc.
Receipts and emails that support your involvement
Common Pitfalls to Avoid
Combining hours from multiple activities that don’t qualify (e.g., investment analysis, education)
Failing to elect REPS status annually
Lack of adequate documentation or proof of hours
Working a full-time non-real estate job while claiming REPS
Spousal Considerations
If you're married and filing jointly, only one spouse needs to meet the REPS requirements to qualify the household. This is a common strategy where one spouse works full-time in real estate while the other has a W-2 job.
Maximize Your Tax Strategy With a CPA
Qualifying for REPS can dramatically reduce your tax burden, but it must be done correctly and strategically. A CPA who specializes in real estate taxation can help you:
Set up systems to track hours
Ensure proper elections are made
Implement bonus depreciation strategies
Help facilitate cost segregation studies
Final Thoughts
Real Estate Professional Status is one of the most valuable tax strategies available to real estate investors, but it requires detailed compliance with IRS rules. With the right planning and professional guidance, REPS can turn your tax liability into a wealth-building opportunity.