People ask how to apply for real estate professional status. You don't. There is no application, no IRS approval, and no separate REPS form. You either meet the tests in section 469(c)(7) for the year or you don't. Then the return has to show it the right way.
This page covers the filing side: what goes on Schedule E, when you need an election statement, what happens to Form 8582, how a joint return works, and why California sees the same rental differently. For what REPS is and why it matters, start with REPS and passive losses.
Step 1: Make sure you actually qualify
Claiming REPS on the return is a statement that both tests were met for that tax year:
- More than half of the personal services you performed in all trades or businesses were in real property trades or businesses in which you materially participated.
- You performed more than 750 hours of services in those real property trades or businesses.
Hours as an employee don't count unless you own more than 5% of the employer. For what counts and what doesn't, see what counts toward real estate professional hours.
Qualifying is only the first gate. Each rental is nonpassive only if you also materially participated in it. See material participation vs. active participation.
Step 2: Schedule E, line 43
Line 43 sits at the bottom of page 2 of Schedule E. It is called "Reconciliation for real estate professionals." The IRS instructions say that if you were a real estate professional for the year, you complete it.
You enter one number. It is the net income or loss you reported anywhere on Form 1040 from all rental real estate activities in which you materially participated under the passive activity loss rules.
A plain example, not a client:
| Rental (you materially participated in each) | Net result |
|---|---|
| Rental A | ($40,000) |
| Rental B | $12,000 |
| Rental C | ($5,000) |
| Line 43 | ($33,000) |
Line 43 is an amount, not a yes or no box. It doesn't create your status. It tells the IRS which rental results you are treating as nonpassive because you qualified.
Step 3: Decide on the grouping election
For material participation, each rental property is its own activity unless you elect to treat all your rental real estate interests as one activity under Treas. Reg. §1.469-9(g). With several properties, that election is often what makes material participation possible.
There is no IRS form for the election. You attach a statement to your original return declaring that you are a qualifying taxpayer and that you are making the election under section 469(c)(7)(A). It is binding for later years in which you are a real estate professional. You can revoke it only after a material change in facts and circumstances. Rev. Proc. 2011-34 gives a path for a late election.
Sample wording and the tradeoffs are in how to make the REPS grouping election.
Step 4: Form 8582
A rental real estate activity in which you materially participated as a real estate professional is not a passive activity, so it stays out of the current-year passive loss math on Form 8582.
You may still need the form. Other passive activities still go on it, such as a rental you did not materially participate in, or a limited partnership. Losses suspended from years before you qualified also follow their own rules. The Form 8582 instructions call these former passive activities. Those old losses are allowed up to the current-year income from that same activity. See suspended passive losses when you become a real estate professional.
Step 5: Joint returns
On a joint return, one spouse has to meet both tests alone. You can't add the two spouses' hours together to reach 750.
Material participation is different. There, the IRS lets you count your spouse's participation in the activity. So a common pattern is one spouse qualifying for REPS and both spouses' hours counting toward material participation in the rentals. See spousal real estate professional status.
Step 6: Keep proof, but don't file it
Nothing about your hours gets attached to the return. The IRS sees the line 43 number and the losses. The proof comes out only if the return is examined.
The regulations say your participation can be shown by any reasonable means, such as appointment books, calendars, or narrative summaries. In practice, a log made during the year holds up much better than one rebuilt later. See real estate professional time logs and audits and the REPS hours log template.
If you use tax software
Two things to check before you file:
- That the line 43 amount matches the net result of the rentals you materially participated in.
- That the grouping election statement, if you're making one, actually goes out with the return as an attachment. A checkbox in the software is not the statement.
California sees it differently
California did not adopt the federal real estate professional rule. A rental that is nonpassive on your federal return can still be passive on your California return. The FTB's Form 3801 instructions tell you to use California adjustment worksheets for an activity that is nonpassive for federal purposes and passive for California purposes.
For many Los Angeles investors, that means the federal loss is allowed and the California loss is suspended. See does California recognize real estate professional status.
Frequently asked questions
Do I have to apply for real estate professional status?
No. There is no application and no IRS approval. You qualify by meeting the more-than-half test and the 750-hour test for the tax year, then you report your rentals as nonpassive and complete Schedule E, line 43.
Is there an IRS form for real estate professional status?
No separate form. You report it on Schedule E. Line 43 is the reconciliation line for real estate professionals. If you make the grouping election under Treas. Reg. §1.469-9(g), you attach a written statement to your original return. There is no form number for that either.
What goes on Schedule E line 43?
The net income or loss you reported anywhere on Form 1040 from all rental real estate activities in which you materially participated under the passive activity loss rules. It is one combined amount, not a checkbox.
Do I still need Form 8582 if I'm a real estate professional?
Rental activities you materially participated in as a real estate professional are not passive, so they stay out of the current-year Form 8582 calculation. You may still need the form for other passive activities or for prior-year unallowed losses.
Can my spouse and I combine hours to qualify?
Not for the REPS tests. On a joint return, one spouse must meet both tests without counting the other spouse's services. For material participation in a rental, you can count your spouse's participation.
Does California accept real estate professional status?
No. California did not adopt the federal rule, so rental activities are generally passive on the California return. The FTB's Form 3801 instructions cover activities that are nonpassive federally and passive for California.
Talk it through with us
Bring last year's federal and California returns, your hours log or calendar, and a list of your rentals. We'll check whether the tests are met, whether the grouping election fits, and what line 43 and Form 3801 should show. 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.