To qualify as a real estate professional, one person has to work more than 750 hours in real property trades or businesses where they materially participate. Those hours also have to be more than half of all the hours that person works in any trade or business that year. Hands-on work counts. That means development, construction, buying, renting, managing, leasing, or brokering real estate. Investor-type time does not count. Neither does W-2 time, unless you own more than 5% of the employer. A spouse's hours can't be added in to pass either test.
This page covers what goes in the count and what stays out. For the bigger picture on passive losses, see our REPS and passive losses page.
The two tests in plain numbers
Section 469(c)(7)(B) of the tax code sets two tests. You have to pass both in the same year.
- The more-than-half test. More than half of the personal services you perform in all trades or businesses must be in real property trades or businesses where you materially participate.
- The 750-hour test. You must perform more than 750 hours of services in those real property trades or businesses.
"More than" matters. Exactly 750 hours fails. And the half test compares real estate hours to everything else you work. If you work 1,000 hours at a part-time job, you need more than 1,000 real estate hours, not just 751.
Both tests apply to one person. On a joint return, one spouse has to pass both tests alone.
Which businesses count
The statute lists them. A real property trade or business is any real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage trade or business. Treasury regulations (Reg. §1.469-9(b)(2)) define several of these terms in more detail.
Two limits sit on top of that list.
- You have to materially participate in the business. Hours in a real estate business count toward the tests only if you materially participate in that business (Reg. §1.469-9(c)(3)).
- Financing is not on the list. In Chief Counsel Advice 201504010, the IRS concluded that a mortgage broker brokers loans, not real property. So mortgage brokerage hours do not count on their own.
Hours that usually count
| Activity | Counts? | Why |
|---|---|---|
| Showing units, screening tenants, signing leases | Yes | Rental, leasing, and management work |
| Collecting rent and handling tenant calls and problems | Yes | Day-to-day management |
| Hiring, scheduling, and supervising contractors | Yes | Operation and management |
| Doing repairs or renovation work yourself | Usually | Construction or operation work. But work an owner wouldn't normally do, done mainly to get the loss allowed, is excluded (Temp. Reg. §1.469-5T(f)(2)(i)) |
| Paying the property's bills and approving invoices as the manager | Usually | Part of running the property, as long as you are the one managing it |
| Touring, negotiating, and closing on property you actually buy | Generally | Acquisition is on the statutory list |
| Selling or leasing real estate as a self-employed agent or broker | Yes, if you materially participate in that brokerage business | Brokerage is on the list |
| Building or developing property as an owner or self-employed contractor | Yes | Development and construction |
Hours that don't count
| Activity | Why it's out |
|---|---|
| Reviewing statements and reports, or building summaries of the numbers for your own use | Investor activity under Temp. Reg. §1.469-5T(f)(2)(ii). It counts only if you are directly involved in day-to-day management or operations |
| Monitoring the property's finances in a non-managerial role | Same investor rule |
| Being "on call" for tenants or guests | Only actual time spent working counts. The Tax Court threw out 744.5 on-call hours in Mirch v. Commissioner, T.C. Memo. 2025-128 |
| Real estate work you do as a W-2 employee (for example, as an employed property manager or leasing agent) | Employee hours don't count unless you own more than 5% of the employer (§469(c)(7)(D)(ii)) |
| Your spouse's hours, when testing whether you pass the 750-hour or half test | Each spouse is tested separately (§469(c)(7)(B)) |
| Work your property manager does | You didn't perform it |
| Courses, seminars, books, and podcasts | Education isn't on the statutory list. Don't count on it |
A few items are gray. Driving to a property to work there is one. Researching deals you never pursue is another. Log them on their own lines so your CPA can judge them separately instead of blending them into the total.
Your W-2 job counts against you
The half test looks at every hour you work in any trade or business. That includes your job. A full-time schedule of about 2,000 hours a year means you would need more than 2,000 real estate hours on top of it. That is possible on paper. It is rare in real life, and it is the first thing an examiner checks.
That is why REPS usually works for a household where one spouse runs the portfolio and doesn't have another full-time job. If both spouses work full time, look at other routes. A short-term rental with an average stay of seven days or less isn't treated as a rental activity. It doesn't need REPS, though you still have to materially participate. For the full W-2 picture, read why rental losses don't offset your W-2.
Spouses: separate for the two tests, combined for material participation
Spouses can't pool hours to reach 750 or to pass the half test. One spouse has to do it alone.
Once one spouse qualifies, the rules change for the next step. For material participation in the rentals themselves, both spouses' work counts together (§469(h)(5) and Temp. Reg. §1.469-5T(f)(3)). So a W-2 spouse's weekend hours at the rentals can help meet material participation, even though they can't help pass the REPS tests. See spousal REPS for how this plays out in a household.
Passing the tests is step one
Qualifying as a real estate professional takes away the automatic "passive" label on your rentals. It doesn't make the losses deductible by itself. Three more things decide what you can use.
- Material participation in each rental. Each rental counts as a separate activity unless you file an election to treat all of them as one (Reg. §1.469-9(g)). The election is a statement filed with your original return. Listing all your rentals on one Schedule E is not an election. The Tax Court has said so, citing Trask v. Commissioner, T.C. Memo. 2010-78.
- Basis and at-risk limits. You can't deduct more than you have at stake.
- The excess business loss cap. For 2026, net business losses above $256,000 ($512,000 on a joint return) can't be used against other income that year. The excess carries forward as a net operating loss (§461(l), Rev. Proc. 2025-32). This matters if you pair REPS with cost segregation and 100% bonus depreciation.
California doesn't follow REPS
California never adopted the real estate professional rule. The Franchise Tax Board's instructions for Form FTB 3801 say that for California purposes, all rental activities are passive. So a loss that is nonpassive on your federal return is still passive on your California return. The $25,000 allowance for active participation still applies in California, with the same income phase-out.
The hours only matter if you can prove them
Most REPS disputes are about the log, not the law. Examiners ask for the hours and then test them against your calendar, your employer's records, and your receipts. Our guide to keeping a REPS time log that holds up in an audit covers what to record and what the Tax Court keeps rejecting.
Frequently asked questions
How many hours do I need for real estate professional status?
More than 750 hours in real property trades or businesses where you materially participate. Those hours also have to be more than half of all the hours you work in any trade or business that year. Exactly 750 hours fails.
Does my W-2 job count against me?
Yes. Your W-2 hours go into the total for the more-than-half test. Real estate work you do as an employee counts toward REPS only if you own more than 5% of your employer.
Can my spouse and I combine hours to reach 750?
No. On a joint return, one spouse has to pass both the 750-hour test and the more-than-half test alone. After one spouse qualifies, both spouses' hours can be combined to show material participation in the rentals.
Does being a licensed real estate agent make me a real estate professional?
Not by itself. A license is not the test. Hours in your own brokerage business can count if you materially participate in it. Hours as a W-2 employee of a brokerage don't count unless you own more than 5% of it. You still need more than 750 hours, the more-than-half test, and material participation in your rentals.
Do hours spent reviewing statements or researching deals count?
Reviewing statements and preparing summaries for your own use are investor activities. They don't count unless you are directly involved in day-to-day management or operations. Time spent buying property you actually acquire generally counts as acquisition work. Time on deals you never pursue is weaker, so log it separately.
Does California recognize real estate professional status?
No. California did not adopt the federal REPS rule. The FTB treats all rental activities as passive for California purposes, so federal REPS losses can still be limited on your California return.
Talk it through with us
If you think your household may qualify, bring a rough count of last year's hours and your most recent return. We'll tell you whether the numbers work, what to log from here, and what REPS would and wouldn't change for you. Book a complimentary 30-minute 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.