Real Estate Professional Status Year-End Checklist: What to Do Before December 31, 2026

Real estate professional status is decided one tax year at a time. For most people that year ends December 31. Hours you work in January 2027 do nothing for your 2026 return. A rental placed in service on January 2 doesn't give you a 2026 deduction either.

Most of the paperwork happens later, when the return is filed. The facts it reports have to exist by year end. This checklist covers what to look at now, while there is still time to change the answer.

For the full REPS picture, start with our REPS and passive losses page.

1. Count your real estate hours against both tests

Under IRC §469(c)(7)(B), you are a real estate professional for 2026 only if you pass two tests for the year:

• More than 750 hours of services in real property trades or businesses in which you materially participate.
• More than half of all the personal services you perform in any trade or business during the year are in those real property trades or businesses.

Both tests use the full year. There is no proration for a partial year and no rounding up.

Pull your log and total it now. Then project the hours you can realistically add by December 31. If you are at 600 hours on October 23, you need more than 150 more. That is a little over two hours a day, every day, for the rest of the year.

The more-than-half test is where people with jobs fail. Hours you work as an employee count in the total but don't count as real estate hours, unless you own more than 5% of the employer (§469(c)(7)(D)(ii)). A full-time W-2 job of 2,000 hours means you need more than 2,000 real estate hours, not 751.

So count your other work too. Consulting, a side business, and W-2 hours all go in the total. If you left a job mid-year, the hours you worked before you left still count.

Investor-type work generally doesn't count. Under Temp. Reg. §1.469-5T(f)(2)(ii), reviewing statements, preparing summaries for your own use, and monitoring finances in a non-managerial role are not participation unless you are directly involved in day-to-day management or operations. See what counts toward real estate professional hours.

2. Check material participation, property by property or as a group

Passing REPS takes away the automatic passive label on your rentals. It doesn't make every rental loss nonpassive. You still have to materially participate in each rental activity under one of the seven tests in Temp. Reg. §1.469-5T(a). The common ones are more than 500 hours in the activity, or more than 100 hours and at least as much as any other individual.

Under Reg. §1.469-9(e)(1), each rental is a separate activity unless you make the grouping election. So if you own four rentals, look at your hours on each one. A rental where your property manager logs more time than you can fail even in a year you pass REPS.

The election under Reg. §1.469-9(g) treats all your interests in rental real estate as one activity. Your hours across the portfolio then count together for material participation.

You make it by attaching a statement to your original 2026 return, which you file in 2027. Nothing gets filed in December. But you should decide now, because it changes which hours you need. Once made, the election binds you in every later year you qualify, and you can revoke it only after a material change in facts. It also changes how suspended losses come out when you sell one property. See how to make the REPS grouping election and material participation vs active participation.

3. Clean up your time log while you can still remember

Temp. Reg. §1.469-5T(f)(4) lets you prove hours by any reasonable means, including appointment books, calendars, and narrative summaries. Daily logs aren't strictly required. In practice, the Tax Court keeps rejecting hours that were estimated after the fact. Moss v. Commissioner, 135 T.C. 365 (2010), is the case courts cite for the rule that a "ballpark guesstimate" isn't enough.

In Mirch v. Commissioner, T.C. Memo. 2025-128, the court threw out 744.5 hours of on-call time because only actual work counts. It also doubted an undated log that gave every task a fixed amount of time.

Before December 31:

• Fill gaps from your calendar, email, texts, and bank records while they are fresh. Mark rebuilt entries as reconstructed and note the source.
• Make sure each entry has a date, the task, the property, who did it, and the time spent.
• Delete on-call time and anything you paid someone else to do.
• Total your non-real-estate hours for the year.
• Save the file somewhere with a date stamp.

The full method is in how to keep a REPS time log that holds up.

4. Know what your spouse can and can't do for you

On a joint return, the REPS tests are met "if and only if either spouse separately satisfies such requirements" (§469(c)(7)(B)). One spouse has to pass both tests alone. You can't add your 400 hours to your spouse's 400 and call it 800. The Mirch court said exactly that about the husband's hours and the wife's 750.

Material participation works differently. Under §469(h)(5), your spouse's participation counts when testing whether you materially participate in an activity. So the qualifying spouse's hours, plus the other spouse's hours on a rental, can combine to meet a material participation test for that rental.

The usual plan is one spouse who works in real estate and passes REPS, with both spouses' hours counted on the rentals. If neither spouse alone will clear 750 hours and the more-than-half test by December 31, plan for passive treatment in 2026 instead of hoping. See spousal real estate professional status.

5. Place property in service before year end, if that is the plan

You can begin to depreciate a rental when it is ready and available for rent, per IRS Publication 527. You don't need a tenant yet. Closing in December is not enough on its own. If the unit still needs work and can't be rented on December 31, it isn't in service.

Two numbers make the date matter:

• Bonus depreciation. Qualifying property acquired after January 19, 2025, can take 100% bonus depreciation under §168(k) as amended in 2025. A cost segregation study moves parts of a building into 5-year, 7-year, and 15-year property that can take that bonus in the year placed in service. See 100% bonus depreciation in 2026.
• The building itself. Residential rental property uses the mid-month convention (Publication 946). A building placed in service in December gets half a month of depreciation for 2026.

The cost segregation study itself can usually be finished after December 31, before you file. The placed-in-service date is the part that has to happen in 2026. Keep proof of it: photos, the listing date, and the date the unit was ready.

Bonus depreciation is not mandatory. You can elect out by class of property under §168(k)(7). That can make sense when the loss would run into the cap in step 7 or stay passive anyway.

6. Short-term rentals and cost seg timing

If you can't pass REPS, a short-term rental is the other common path. Under Temp. Reg. §1.469-1T(e)(3)(ii), an activity with an average period of customer use of seven days or less is not a rental activity for the passive rules. You still have to materially participate in it.

Both pieces are measured over the tax year. The average stay comes from actual 2026 guest stays, not your listing settings. The material participation hours also have to happen in 2026.

That creates a year-end trap. If you buy and furnish a short-term rental in late 2026, you have only weeks to log the hours. A test like more than 100 hours and at least as much as anyone else, including your cleaner, gets hard to meet in a few weeks. If you miss it, a large cost seg loss from that property is passive for 2026. Run the hours math before you count on a 2026 loss.

See REPS vs the short-term rental exception and short-term rentals without REPS.

7. Check the excess business loss cap

Even with REPS and material participation, §461(l) limits how much net business loss you can use in one year. For tax years beginning in 2026, Rev. Proc. 2025-32 sets the threshold at $256,000, or $512,000 on a joint return. Wages don't count as business income for this math, so a big salary doesn't raise the cap.

The disallowed amount isn't lost. It carries forward as a net operating loss under §461(l)(2).

If a cost seg study on several properties would produce a loss well above the cap, think about which properties to place in service this year and which can wait. See REPS, cost segregation, and the 2026 excess business loss cap.

The IRS hasn't published the 2027 threshold as of October 23, 2026. We will update this page once it does.

8. Plan California separately

California doesn't follow federal REPS. The FTB's 2025 Form 3801 instructions say California did not conform to §469(c)(7) and that all rental activities are passive for California purposes. A loss that offsets your wages on the federal return can stay suspended on your California return.

California also doesn't follow federal bonus depreciation. The FTB's Form 3885A instructions list §168(k) as a federal and state difference. Your California depreciation on a cost seg study will be smaller in the first year.

California has its own excess business loss rule, figured on form FTB 3461. For 2025 the FTB threshold was $313,000, or $626,000 on a joint return. California treats the disallowed amount as an excess business loss carryover, not an NOL. The FTB hasn't released its 2026 figure yet.

So a federal refund from REPS and cost seg doesn't mean your California tax drops by the same amount. Check your California estimated payments before year end. See California real estate professional status and FTB 3801.

The short version

Before December 31, 2026:

• Total your real estate hours and your other work hours. Project both to year end.
• Confirm one spouse alone passes both REPS tests.
• Check material participation on each rental, or decide on the grouping election.
• Fix your time log while your calendar and memory still help.
• Get any property you want to deduct for 2026 ready and available for rent, with proof of the date.
• If you are using a short-term rental, make sure the 2026 hours are really there.
• Model the $256,000 or $512,000 cap before you order studies on every property.
• Run the California numbers too.

Frequently asked questions

Can I still qualify for real estate professional status for 2026 if I start logging hours in November?

Possibly, if you actually did the work earlier in the year and can prove it. Both REPS tests count hours for the whole 2026 tax year, so earlier work counts if you can rebuild it from calendars, email, texts, and payment records. Hours you never worked can't be added. The Tax Court rejects estimates made after the fact, so mark any reconstructed entries and note the source for each one.

Can my spouse's hours count toward my 750 hours?

No. On a joint return, one spouse has to pass both the more-than-750-hour test and the more-than-half test alone under IRC §469(c)(7)(B). Your spouse's hours do count when testing material participation in a rental under §469(h)(5).

Do I have to make the REPS grouping election before December 31?

No. You make the election under Treas. Reg. §1.469-9(g) by attaching a statement to your original 2026 return, which you file in 2027. You should decide before year end anyway, because the election changes whether material participation is tested property by property or across all your rentals together.

Does a rental have to be rented by December 31 to depreciate it for 2026?

No. IRS Publication 527 says you can begin to depreciate rental property when it is ready and available for rent. A tenant isn't required. A property that still needs work on December 31 isn't placed in service for 2026.

Does the cost segregation study have to be done by December 31?

Usually not. The study can generally be completed after year end and before you file. What has to happen in 2026 is the placed-in-service date of the property.

What is the 2026 excess business loss limit?

For tax years beginning in 2026, Rev. Proc. 2025-32 sets the §461(l) threshold at $256,000, or $512,000 on a joint return. Losses above the cap carry forward as a net operating loss. The IRS hasn't published the 2027 threshold as of October 23, 2026.

Does California recognize real estate professional status?

No. The FTB's Form 3801 instructions say California did not conform to IRC §469(c)(7) and that all rental activities are passive for California purposes. California also doesn't follow federal bonus depreciation, so the federal and California results for 2026 can be very different.

Talk it through before December 31

Bring your 2026 hours log, a list of your rentals and who manages each one, your spouse's work schedule, and any properties you plan to close on or place in service before year end. We will check both REPS tests, material participation, the loss cap, and the California side while there is still time to act. Book a complimentary consultation. 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.