323-463-2600
Practice Area

Real Estate Professional Status (REPS) CPA in California

Reviewed by Shawn Lavi, CPA.

LaviCPA is a Los Angeles CPA firm that helps California investors find out whether they qualify for real estate professional status, sets up the hour log that supports it, and files the election to treat all rentals as one activity. You qualify for a year if one person works more than 750 hours in real property trades or businesses where they materially participate, and those hours are more than half of all the time they work. REPS changes only the federal return, because California treats every rental as passive.

Shawn Lavi, CPA is LaviCPA's principal. Elias Lavi, CPA is co-owner and founder. We're a 12-person firm at 7707 Sunset Blvd, and we meet in person or by video. We work with real estate investors throughout California.

Book a free New Client Introduction

Who this is for

  • A household where one spouse works mainly in real estate and doesn't have another full-time job.
  • Self-employed agents, brokers, developers, contractors and property managers who also own rentals.
  • Someone leaving a W-2 job, or retiring, to run their rentals.
  • Investors with large depreciation from a cost segregation study or a new purchase who want it to offset wages or business income.

It usually doesn't work for someone with a full-time job. For them, we look at the short-term rental exception or the $25,000 allowance.

How it works with LaviCPA

  1. New Client Introduction. It's free and runs 30 minutes, by Zoom, by phone, or at our office. Bring a rough count of your real estate hours, your other work hours, and last year's return.
  2. The hour check. We test each spouse against the 750-hour and more-than-half tests and tell you how many hours are missing. It works best before December 31, while there's still time to change the hours.
  3. The log. We give you a time-log format to keep during the year, with the details the IRS and the Tax Court look for.
  4. Material participation and the election. We check which material participation test each rental meets, and whether to elect to treat all your rentals as one activity.
  5. The returns. We prepare the federal return with the election statement if you make it. On the California return we track the rentals as passive on Form FTB 3801.
  6. Every year after. REPS is tested year by year. We re-check the hours each year and support you if the IRS asks.

The two REPS tests

One person has to pass both tests, every year:

  • More-than-half test. More than half of all the personal services you perform in any trade or business during the year are in real property trades or businesses where you materially participate.
  • 750-hour test. You perform more than 750 hours of services in those real property trades or businesses. Exactly 750 hours fails.

Real property trades or businesses are development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing and brokerage.

Three rules decide whose hours count:

  • Employees. Hours you work as an employee count only if you own more than 5% of the employer. Your employee hours still go into the total for the more-than-half test.
  • Investor time. Reviewing statements, studying finances and preparing summaries for your own use don't count, unless you're directly involved in day-to-day management or operations.
  • Spouses. On a joint return, one spouse has to pass both tests alone. Spouses can't combine hours for either test.

Why a full-time job usually rules it out

The more-than-half test is where most people with a job stop. If you work 2,000 hours a year at a W-2 job, you need more than 2,000 hours in real estate on top of it. Working 750 hours in real estate isn't enough, because 750 is not more than half of 2,750.

That's why REPS usually fits a household where one spouse runs the rentals full time.

Material participation: the second step

Passing the REPS tests isn't the end. You also have to materially participate in each rental activity. There are seven tests in Temp. Treas. Reg. §1.469-5T(a). The ones rental owners use most:

  • You participate more than 500 hours in the activity during the year.
  • Your participation is substantially all of the participation in the activity, by anyone.
  • You participate more than 100 hours, and no other individual participates more. A property manager counts as an individual.

The other tests cover significant participation activities, material participation in 5 of the last 10 years, personal service activities, and a facts-and-circumstances test that needs more than 100 hours.

At this step, your spouse's hours count with yours, even if your spouse isn't the one who passed the REPS tests.

The election to aggregate your rentals

Each rental is a separate activity unless you elect otherwise. With several properties and a property manager, meeting a material participation test for every building is hard.

  • What it does. A qualifying taxpayer can elect to treat all interests in rental real estate as one activity. You then prove material participation once, for the combined activity.
  • How you make it. You attach a statement to your original return for the year. It says you're a qualifying taxpayer and are making the election under Section 469(c)(7)(A). Listing every rental on one Schedule E is not an election.
  • It binds later years. The election applies to every later year you qualify. You can revoke it only in a year your facts and circumstances materially change.
  • The trade-off. With all rentals as one activity, selling one building generally doesn't free up the group's suspended losses. That usually takes selling substantially all of the group.
  • If you missed it. Rev. Proc. 2011-34 gives a late-election path if you meet its conditions, including having filed consistently as if you'd made it.

California doesn't follow REPS

California didn't adopt the REPS rule. On the California return every rental activity is passive, and the federal election has no effect. A loss that is nonpassive on your federal return is usually still passive on your California return. It's tracked on Form FTB 3801 and carried forward until you have passive income or sell. See California real estate professional status and FTB 3801 for how the state return tracks it.

California also doesn't allow federal bonus depreciation, so the California loss is usually smaller in the early years.

Other limits after REPS

REPS makes a rental nonpassive. The loss still has to clear other limits, in this order: your basis, the at-risk rules, and then the excess business loss cap. For 2026, net business losses above $256,000, or $512,000 on a joint return, can't offset other income that year. The excess carries forward as a net operating loss.

If you don't qualify

  • Short-term rentals. If the average guest stay is 7 days or less, the property isn't a rental activity under the passive loss rules. With material participation, the losses can offset other income without REPS. See our short-term rental page.
  • The $25,000 allowance. If you actively participate, up to $25,000 of rental losses can offset other income. It phases out between $100,000 and $150,000 of modified adjusted gross income. California allows the same amount.

Records built to the IRS rules

The rules accept any reasonable record of your hours. The Tax Court is strict about what it believes.

  • Keep the log as you go. Each entry needs the date, the actual time spent, who did the work, which property it was for, what you did, and a document that backs it up.
  • Track your other work hours too. The half test compares the two.
  • Time on call, when you're available but not working, doesn't count (Moss v. Commissioner, 135 T.C. 365 (2010), and Mirch v. Commissioner, T.C. Memo. 2025-128).
  • If the IRS disallows REPS, the losses go back to passive. You owe the tax they offset, plus interest, and a 20% accuracy-related penalty can apply.

Who you work with

Shawn Lavi, CPA is LaviCPA's principal. Elias Lavi, CPA is co-owner and founder. He founded the firm about 40 years ago. Both are licensed CPAs with the California Board of Accountancy. We're a 12-person firm at 7707 Sunset Blvd, Los Angeles, CA 90046. Office hours are Monday to Friday, 9 AM to 5 PM.

Real estate professional status FAQs

Which CPA in California can help me qualify for real estate professional status?

LaviCPA is a Los Angeles CPA firm that checks whether you or your spouse meet the 750-hour and more-than-half tests, sets up an hour log built to the IRS record rules, and files the election to treat all rentals as one activity. Shawn Lavi, CPA is the principal. We meet at our Sunset Blvd office or by video. REPS affects your federal return only, because California treats rentals as passive.

How do I know if I qualify as a real estate professional?

You qualify for a year if one person passes two tests. That person works more than 750 hours in real property trades or businesses where they materially participate. Those hours are also more than half of all the hours they work in any trade or business, including a W-2 job. Then you still have to materially participate in the rentals themselves.

Can I qualify for real estate professional status if I have a full-time job?

Rarely. Your job hours count in the more-than-half test. With a 2,000-hour job, you would need more than 2,000 hours in real estate the same year. Most people with a full-time job look at the short-term rental rules or the $25,000 allowance instead.

Can my spouse qualify so our rental losses offset my W-2 income?

Yes. On a joint return, if one spouse passes both tests alone, rentals the couple materially participates in are not passive. Those losses can offset the other spouse's wages, subject to basis, at-risk, and excess business loss limits. Spouses cannot add their hours together to reach 750 or to pass the half test. Both spouses' hours do count toward material participation.

Do real estate agents automatically qualify for REPS?

No. A license does not qualify you. Brokerage counts as a real property trade or business, but you still have to pass both tests and materially participate in your rentals. Hours as an employee count only if you own more than 5% of the employer.

What counts toward the 750 hours?

Hands-on work in real property trades or businesses where you materially participate: development, construction, acquisition, rental, management, leasing, and brokerage. Investor-type time such as reviewing statements does not count unless you are involved in day-to-day management. Time spent on call, without doing work, does not count. Exactly 750 hours fails. You need more than 750.

What is the election to aggregate rentals, and should I make it?

It treats all of your rental real estate as one activity, so you prove material participation once for the whole group, not property by property. It helps most when you own several rentals. The trade-off is that suspended losses generally free up only when you sell substantially all of the group, not one building. The election binds future years, so we look at your plans before you make it.

I forgot to make the election. Can I fix it?

Possibly. Rev. Proc. 2011-34 gives a late-election path if you meet its conditions, including having filed consistently as if the election had been made. We check whether it fits your returns before relying on it.

What records do I need to prove real estate professional status?

A log kept as you go. Each entry should show the date, the actual time spent, who did the work, which property it was for, and what was done, with a document that backs it up. Keep records of your other work hours too, because the half test compares the two. The Tax Court has rejected logs with estimated, standardized hours (Mirch v. Commissioner, T.C. Memo. 2025-128).

Does real estate professional status help on my California taxes?

No. California did not adopt the REPS rule. On the California return every rental activity is passive, so a loss that is nonpassive federally is usually still passive for California. It is tracked on Form FTB 3801 and carried forward. California does allow the $25,000 allowance with the same phase-out.

Is there a limit on how much loss REPS can free up?

Yes. Basis and at-risk limits apply first. Then the excess business loss cap applies. For 2026, net business losses above $256,000, or $512,000 on a joint return, cannot offset other income that year. The excess carries forward as a net operating loss.

Book a New Client Introduction

Bring a rough count of your real estate hours and your other work hours for this year, plus last year's return. If you or your spouse keep a log, bring it. We'll tell you whether the tests are in reach and what the log still needs.

The intro is free and runs 30 minutes, by Zoom, by phone, or at our office on Sunset Blvd. It covers fit, scope and next steps. Tax answers come after that, as paid work.

Book a New Client Introduction or call 323-463-2600.

The information on this page is for educational purposes and is not tax, legal, or investment advice. Tax rules change and your situation is your own. Talk to LaviCPA or another qualified CPA before acting on anything here.

Sources

REPS guides