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Real Estate Professional Status (REPS)
The ultimate tax code hack for serious real estate investors
By default, the IRS considers all rental income and losses to be "passive." This means your massive paper losses caused by depreciation get trapped on your return, unable to offset your active W-2 or business income.
Real Estate Professional Status (REPS) breaks the lock. Qualifying for REPS allows your passive rental income and losses to be classified as active. If you generate significant operating or depreciation losses, this status allows those losses to cleanly offset your other income, lowering your overall tax bill aggressively.
The Statutory Tests (You Must Meet BOTH)
1. The >50% Rule
More than half of your personal working hours during the tax year must be spent in "real property trades or businesses" in which you materially participate. (Development, construction, acquisition, conversion, rental operation, property management, leasing, or brokerage).
2. The 750-Hour Rule
You must spend more than 750 hours in the tax year in those real property trades or businesses.
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Material Participation Tests
Just qualifying as a Real Estate Pro isn’t enough. You must also materially participate in your rentals. You generally must meet one of the following criteria for each property (unless you elect to group activities):
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500 hours in the activity.
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100 hours in the activity AND you do more than any other individual.
Substantially all of the participation (you do everything, more than anyone else).
Do I Want to Group My Rentals?
Making an election to group all rental real estate activities as one single activity makes hitting the material participation test easy (e.g., getting 500 hours across 5 properties instead of per property). We’ll analyze the drawback: when you sell one property out of the group, suspended passive losses might stay locked until the entire group unwinds. We will structure the exact plan for your portfolio.