Yes, and contractors are some of the people best placed to do it. Construction and reconstruction are named in IRC §469(c)(7)(C) as real property trades or businesses. So the hours you spend running your construction company can count toward real estate professional status (REPS).
Two things decide whether that actually works for you. First, hours you work as an employee don't count unless you own more than 5% of the company. Second, qualifying doesn't make your rentals nonpassive by itself. You still have to materially participate in them, and your job sites don't help with that.
For the REPS rules in full, start with our REPS and passive losses page.
Why contractors ask about REPS
Profit from a construction business you run full time is already nonpassive. REPS doesn't change that. What REPS changes is how losses from your rentals are treated.
Without REPS, a rental loss is passive. It can only offset passive income, and the rest is suspended until you have passive income or sell. With REPS and material participation, that rental loss can offset your construction profit. That matters most in a year with large depreciation, for example after a cost segregation study. See REPS, cost segregation, and the excess business loss limit for the cap that still applies.
The two REPS tests
Under §469(c)(7)(B), you qualify for a year only if both are true:
- More than half. More than half of the personal services you perform in all trades or businesses that year are in real property trades or businesses in which you materially participate.
- More than 750 hours. You perform more than 750 hours of services that year in real property trades or businesses in which you materially participate.
A contractor who owns the company and works in it full time often passes both on construction hours alone. On a joint return, one spouse has to pass both tests alone. See what counts toward real estate professional hours for the hour rules.
Construction is on the list
Section 469(c)(7)(C) defines a real property trade or business as "any real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage trade or business." IRS Publication 925 puts it the same way. A real property business is one that "constructs or reconstructs" real property, among other things.
Treas. Reg. §1.469-9(b)(2) defines development and redevelopment. Development covers preparing raw land for subdivision or for "construction of residential or commercial buildings." Redevelopment covers demolition and clearing a site "for new development or construction." So site work, grading, and demolition crews are covered too.
The regulations don't yet define construction or reconstruction. Those paragraphs are marked reserved. Building or rebuilding a structure fits the plain words of the statute. For specialty trades, such as plumbing, electrical, or roofing, it depends on what the business actually does. Work on new buildings or major rebuilds is the strongest case. A business that mostly does service calls and small repairs is a closer call, so talk it through before you rely on it.
Selling materials is not the same thing
The regulation draws a line for products. Items made or sold for later installation, "for example, bricks, nails, paint, and windowpanes," are not real property "prior to the completed incorporation or installation of such property into the real property." That comes from Treas. Reg. §1.469-9(b)(2)(i)(A).
So a lumber yard, a supply house, or a cabinet shop that only builds and sells product isn't a real property business on that activity. Installing what you sell, as part of construction, is a different question. Your records should show which hours were spent on which.
The rule that decides most cases: the 5% owner test
Section 469(c)(7)(D)(ii) says "personal services performed as an employee shall not be treated as performed in real property trades or businesses." That rule doesn't apply if you are a 5-percent owner of your employer, as defined in §416(i)(1)(B). IRS Publication 925 says you were a 5% owner "if you owned (or are considered to have owned) more than 5% of your employer's outstanding stock, outstanding voting stock, or capital or profits interest."
Treas. Reg. §1.469-9(c)(5) adds two details:
- Employee hours still count in the total. They are treated as performed in a trade or business, just not a real property one. A W-2 job raises the bar for the more-than-half test.
- Ownership is tracked during the year. If you were a 5% owner for only part of the year, only the hours you worked while you were a 5% owner count as real estate hours.
Three common setups
You own the construction company
If you run the business as a sole proprietor, or you own more than 5% of the LLC, partnership, or corporation, your construction hours can count. That includes an S corporation that pays you a W-2 wage. The W-2 doesn't hurt you if you own more than 5%.
You also need to materially participate in the construction business itself. For an owner who runs crews and bids jobs full time, that is rarely the hard part. Keep a log anyway.
You are a W-2 superintendent or project manager
If you work for someone else's construction company and own 5% or less, your job hours count only in your total hours. Say you work 2,100 hours a year as a superintendent. To pass the more-than-half test, you would need more than 2,100 hours of qualifying real estate work somewhere else, on top of the job. That is the same wall most full-time employees hit. See why you can't deduct rental losses against W-2 income.
If you are being offered equity, the timing matters. Hours count only from the date your ownership goes above 5%.
One spouse builds, the other has a W-2 job
On a joint return, only one spouse needs to qualify, and that spouse has to pass both tests alone. A spouse who owns a construction company can qualify even if the other spouse works full time somewhere else. For material participation in your rentals, though, both spouses' hours count together. See spousal real estate professional status.
Qualifying is only half of it
Once you pass both REPS tests, each rental is still tested on its own for material participation, unless you make the election to treat all your rentals as one activity. Section 469(c)(7)(A) and Treas. Reg. §1.469-9(e)(1) set that rule.
Treas. Reg. §1.469-9(e)(3)(i) also says a real estate professional can't group rentals with a construction business or any other activity. So 2,000 hours on client jobs don't count as hours on your own fourplex. Work you do on your own rentals, such as repairs, turnovers, or a remodel you manage yourself, does count toward material participation in those rentals. Log it separately from client work.
For owners with several rentals, the election under Treas. Reg. §1.469-9(g) can make material participation easier to show, because all your rental hours are pooled. It binds you in later years, so weigh it first. See how to make the REPS grouping election and material participation vs. active participation.
Pick your real property businesses once
Treas. Reg. §1.469-9(d)(1) lets you decide, based on the facts, whether your construction work and your rentals are one real property business or several. Under §1.469-9(d)(2), once you choose, you can't change it in later years unless the first choice was "clearly inappropriate" or the facts change in a way that makes it so. That choice is separate from the rental election above. Get it right the first year you claim REPS.
A simple example
These are hypotheticals, not client results.
Owner-builder. Marco owns 100% of a general contracting LLC and works 2,000 hours in it during 2026. He has no other job. He owns three rentals and logs 180 hours on them doing repairs and tenant turnovers himself. His construction hours count, so he passes both REPS tests. With the grouping election, his 180 rental hours are pooled. He can show material participation if he meets one of the seven tests, for example more than 100 hours and more than anyone else. His rental losses can then be nonpassive, subject to basis, at-risk, and the excess business loss limit.
Employed superintendent. Dana is a salaried superintendent at a regional builder. She owns no equity and works 2,100 hours. She owns two rentals and logs 250 hours on them. Her job hours count only in her total. Her real estate hours are 250, which fails both tests. Her rental losses stay passive, and the $25,000 allowance is phased out once modified AGI passes $100,000 and is gone at $150,000.
California is a separate answer
California doesn't conform to §469(c)(7). Under the FTB's Form 3801 instructions, rental activities stay passive for California even when you qualify federally. A contractor who uses REPS on the federal return will usually carry different passive loss numbers on the California return. See California real estate professional status and FTB 3801.
What to keep
- Ownership records. Your operating agreement or stock ledger showing your percentage, and the date it changed.
- A time log. Your hours in the construction business, and separately, the hours on your own rentals. Calendars, job logs, and permits help back it up. Courts give little weight to estimates made after the fact. See how to keep a REPS time log that holds up in an audit.
- Any other job hours. You need them for the more-than-half test.
- The election statement, if you make the §1.469-9(g) election, attached to a timely filed original return.
Frequently asked questions
Does a general contractor qualify as a real estate professional?
A general contractor can. Construction and reconstruction are real property trades or businesses under IRC §469(c)(7)(C). If you own the company, or more than 5% of your employer, your construction hours count toward the more-than-half test and the 750-hour test. You also need to materially participate in the construction business.
Do W-2 construction hours count toward the 750-hour test?
Only if you own more than 5% of your employer. IRC §469(c)(7)(D)(ii) says services you perform as an employee are not treated as performed in a real property trade or business unless you are a 5-percent owner. Treas. Reg. §1.469-9(c)(5) still counts those hours in your total working hours, which makes the more-than-half test harder.
If I qualify through my construction business, are my rental losses automatically nonpassive?
No. Qualifying for REPS is the first step. You still have to materially participate in each rental, or in all of them together if you make the election under Treas. Reg. §1.469-9(g). Treas. Reg. §1.469-9(e)(3)(i) says you can't group your rentals with your construction business.
Do subcontractors like electricians, plumbers, and roofers qualify?
It depends on the work. The statute names construction and reconstruction, but the regulations don't define those terms yet. Work on new buildings or major rebuilds fits the statute best. A business that mostly does service calls and repairs is a closer call.
Does selling building materials count as a real property business?
Not on its own. Treas. Reg. §1.469-9(b)(2)(i)(A) says products such as bricks, nails, paint, and windowpanes aren't real property until they are installed. Making or selling them isn't a real property trade or business.
Does California recognize real estate professional status for contractors?
No. California doesn't conform to IRC §469(c)(7), so rental activities stay passive on the California return and suspended losses are tracked on Form FTB 3801.
Talk it through with us
Bring your ownership documents for the construction company, your W-2 if you have one, last year's return, and whatever hours log you keep. We'll tell you whether your construction hours count, whether your rentals clear material participation, and whether the grouping election helps. Book a new client introduction.
LaviCPA is a Los Angeles CPA firm for real estate investors. Shawn Lavi, CPA, is the firm's principal. Elias Lavi, CPA, is its founder and co-owner.