What is Real Estate Professional Status (REPS) and How it Works

There are a variety of tax-saving strategies available for those in the short-term rental industry. The STR Tax Loophole and Real Estate Professional Status (REPS) are among the most prevalent. Combining these with others, like bonus depreciation and cost segregation, can result in huge tax deductions.

With 100% bonus depreciation potentially returning via the One, Big, Beautiful Bill, STR hosts, and owners must be updated on what tax strategies they qualify for and those they can use. So, today, we’ll guide you through Real Estate Professional Status (REPS) and help you find out if it’s something you can add to your list.

What is Real Estate Professional Status (REPS)?

Real Estate Professional Status (REPS) is a special IRS designation that separates casual property owners from those who treat real estate as a true business. At its core, REPS is about time, effort, and intent. The IRS uses this status to determine who is actively engaged in real estate trades or businesses and who’s simply collecting passive income.

Normally, rental income is considered “passive.” That means if your properties generate losses through depreciation, repairs, or operating expenses, you can’t use those losses to offset your “active” income, like your salary or business profits.

But REPS can help you with that. If you qualify as a real estate professional, the IRS treats your rental activities as non-passive since it’s a part of your active hours. This unlocks the ability to use those real estate losses to reduce your tax bill on active income. For high earners or anyone with significant rental holdings, this can translate into substantial tax savings.

While most of those who fall under REPS are real estate agents or brokers, it isn’t exclusive to them. Anyone from investors to landlords, developers, and even short-term rental hosts can potentially qualify as long as they meet the IRS’s strict requirements.

The distinction between REPS and a standard real estate investor is mainly about involvement. If you’re rolling up your sleeves and managing your real estate properties, REPS could be within reach.

Who Qualifies for REPS?

Now that you know what REPS is, how can an individual qualify for it? Qualifying for Real Estate Professional Status (REPS) is mainly about how much time and effort you put into real estate activities throughout the year. The IRS has set out three main requirements: the 50% test, the 750-hour test, and the material participation test.

The 50% Test

To pass the 50% test, you must spend more than half of your total working hours in real property trades or businesses during the tax year. This means if you have a full-time job outside of real estate, qualifying for REPS becomes extremely difficult.

For example, if you work 2,000 hours a year at a standard non-real estate full-time job, you’d need to log at least 2,001 hours in real estate activities. That’s essentially two full-time jobs at about 40 work hours per week each.

The calculation includes all personal services performed in trades or businesses. Passive investments don’t count toward either side of the equation. Neither does managing your stock portfolio.

The 750-Hour Test

The second requirement is the 750-hour test. So, aside from dedicating at least 50% of your total working hours to real estate, you must also spend at least 750 hours per year providing personal services in real property trades or businesses in which you materially participate. That’s about 14.4 hours per week, which doesn’t seem too bad.

These hours can be spread across multiple qualifying activities, such as property management, leasing, development, and more. However, they must be legitimate business activities. Property tours or researching markets don’t count. The IRS wants actual work to qualify for this requirement.

Material Participation Test

Meeting the first two tests isn’t enough. The final test is material participation. To qualify for REPS, you must also materially participate in your rental activities. The IRS has several ways to prove material participation, and you only need to meet at least one to qualify. Here are all the material participation tests you can qualify for:

• 500+ hours: Participate more than 500 hours during the tax year
• Substantially all participation: Your participation constitutes substantially all participation by everyone in the activity
• 100+ hours + most participation: Participate more than 100 hours and at least as much as any other individual
• Significant participation activities: Activity is significant participation (100+ hours), and your total across all significant participation activities exceeds 500 hours
• Five of ten years: Materially participated in any five of the ten preceding tax years
• Personal service activity: Activity is personal service, and you materially participated in any three preceding years
• Regular, continuous, substantial: Participate on a regular, continuous, and substantial basis based on facts and circumstances

It’s most common for real estate professionals to automatically qualify for the 500-hour requirement. If you own multiple properties, you can elect to aggregate them and treat all rentals as a single activity. This makes it easier to meet the participation requirement.

What Counts as Real Property Trades or Businesses?

The IRS broadly defines real property trades or businesses. Qualifying activities include development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage of real property. However, activities like mortgage brokering and passive investing do not count. Make sure to contact a qualified tax professional to determine which of your activities qualifies.

Special Considerations

There are a couple of special considerations that can help you meet the some of the REPS requirements.

1. If married, you can file jointly. Only one spouse alone must meet the 50% and 750-hour tests, but both spouses’ hours can count toward material participation in a specific activity
2. If you’re an employee in a real estate business, your hours only count if you own at least 5% of the company.
3. The tests must be met every year, there’s no carryover from prior years

One recommendation is to track every minute meticulously. Use time-tracking apps, detailed calendars, or activity logs. The IRS is known for doing audits with these hourly requirements and estimates won’t survive an audit. Document what you did, when you did it, and how long it took.

Key Activities That Count Toward REPS (Real Estate Professional Status) Hours

Not all real estate work is created equal in the eyes of the IRS. To qualify for Real Estate Professional Status, you need to spend your hours on activities that count. So, what exactly makes the cut?

Qualifying Activities

The IRS recognizes a broad range of hands-on real estate tasks. These include:

1. Property management: Overseeing day-to-day operations, handling tenant issues, collecting rent, and coordinating repairs.
2. Acquisition and leasing: Searching for new properties, negotiating purchases or leases, and marketing rentals.
3. Development and redevelopment: Planning, supervising, or managing construction and renovation projects.
4. Conversion and reconstruction: Transforming properties for new uses or updating existing structures.
5. Operation and maintenance: Regular upkeep, scheduling maintenance, and ensuring properties remain in good condition.
6. Research and due diligence: Analyzing markets, reviewing potential investments, and conducting property inspections.

What Doesn’t Count

Certain activities, no matter how time-consuming, won’t help you qualify for REPS:

1. Purely investment tasks: Reviewing financials, reading reports, or making decisions as a passive investor.
2. Mortgage brokering: Acting as a loan broker or originator doesn’t qualify.
3. Minimal involvement: Time spent on activities where you don’t materially participate, such as hiring a property manager and stepping back.

Given the IRS’s heightened scrutiny of STR operators, meticulous record-keeping is a must. Maintain detailed logs of every hour spent on each property, documenting guest interactions, maintenance, and all operational tasks. If you own several STRs, consider making the aggregation election to treat all properties as a single activity, as this can simplify meeting the material participation threshold.

Wrapping Things Up

REPS can unlock major tax savings for hands-on real estate professionals, but strict requirements and meticulous documentation are essential. If you’re committed and can qualify, the benefits are substantial. Consult a tax expert to determine if pursuing Real Estate Professional Status aligns with your investment strategy.

With the right approach, STR owners can leverage REPS to offset significant amounts of active income, but only if they approach the process with diligence and a clear understanding of IRS expectations.

Disclaimer: This article is for educational purposes only and does not constitute professional tax, legal, or financial advice. Tax laws are complex and frequently changing. The IRS may interpret regulations differently than presented. Tax policies are subject to change, implementation details may vary, and retroactive application is not guaranteed. Always consult with a qualified tax professional regarding your specific situation before making any business or investment decisions. We assume no liability for actions taken based on this content.