What is real estate professional status?

A federal tax status under IRC Section 469(c)(7). If you qualify, your rentals are not passive just because they are rentals. Rentals you materially participate in can produce losses that offset wages and other nonpassive income. You qualify for a year if you work more than 750 hours in real property trades or businesses where you materially participate, and those hours are more than half of all the hours you work in any trade or business.

Can a spouse with a full-time W-2 job qualify for REPS?

Rarely. The more-than-half test counts W-2 hours in the total. With a 2,000-hour job, you would need more than 2,000 hours in real property trades or businesses in the same year. Meeting the 750-hour minimum is not enough on its own.

Can one spouse qualify while the other works a W-2 job?

Yes. On a joint return, if one spouse passes both REPS tests alone, rentals the couple materially participates in are nonpassive, and those losses can offset the other spouse's W-2 income, subject to basis, at-risk, and excess business loss limits. The W-2 spouse's hours can count toward material participation in the rentals, but not toward the 750-hour or more-than-half test.

Can my spouse and I combine hours to reach 750?

No. Each spouse is tested separately for the 750-hour and more-than-half tests. After one spouse qualifies, both spouses' hours can be combined to show material participation in the rentals.

Does exactly 750 hours qualify?

No. The test requires more than 750 hours. Exactly 750 fails, and so does a total that falls to 750 or below once unsupported entries are removed.

Do hours I work as an employee in real estate count?

Only if you own more than 5% of your employer. Otherwise, hours worked as an employee, for example as an employed property manager or leasing agent, do not count toward REPS. They still count in your total hours for the more-than-half test.

What is the election to treat all rentals as one activity?

An election under IRC Section 469(c)(7)(A) and Treas. Reg. Section 1.469-9(g) to treat all of your interests in rental real estate as one activity, so material participation is tested once for the combined activity. You make it by attaching a statement to your original return that says you are a qualifying taxpayer and are making the election under Section 469(c)(7)(A). Listing all rentals on one Schedule E is not an election.

Can I revoke the election?

Only in a year when your facts and circumstances have materially changed. You revoke it with a statement on your original return that explains the change. No IRS consent is needed. A year where the election is simply less helpful is not a material change. Otherwise, the election binds you in every later year you qualify as a real estate professional.

I missed the election. Can I still make it?

Possibly. Rev. Proc. 2011-34 gives a late-election path for taxpayers who 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 prove the hours?

A record kept as you go, with one entry per task showing the date, the actual time spent, who did the work, which property or business it was for, what you did, and a document that backs it up. The regulations accept any reasonable means, but the Tax Court rejects ballpark estimates, inflated logs, and on-call time. Keep records of your other work hours too, because the more-than-half test compares the two.

Does REPS help on my California return?

No. California did not adopt Section 469(c)(7). For California, all rental activities are passive, so losses that are nonpassive on your federal return are usually still passive on your California return and are tracked on Form FTB 3801. 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 under IRC Section 461(l).

Real Estate Professional Status (REPS) & Passive Losses

The passive loss rule

Under Section 469, rental activity is passive by default, however many hours you put in. Passive losses can only offset passive income. They can't offset wages, income from a business you materially participate in, or portfolio income like interest and dividends.

Losses you can't use are suspended and carried forward. They free up when you have passive income, or when you sell your entire interest in the activity to an unrelated buyer in a fully taxable sale. For a high-income investor with large depreciation, that can mean years of suspended losses while you pay full tax on your salary. REPS is the main way out on the federal return.

What REPS changes

If you qualify as a real estate professional and you materially participate in a rental, that rental is not passive. Its losses can offset W-2 wages, business income, and other nonpassive income on your federal return. For an investor with $100,000 or more of depreciation from cost segregation, that is the difference between using the loss this year and carrying it forward for years.

Other limits still apply, in this order: your basis, the at-risk rules, and then the excess business loss cap. For 2026, net business losses above $256,000 ($512,000 on a joint return) can't offset other income that year. The excess carries forward as a net operating loss (IRC Section 461(l), made permanent by the One Big Beautiful Bill Act, with 2026 amounts from Rev. Proc. 2025-32). This matters most when REPS is paired with 100% bonus depreciation, which is back for property acquired after January 19, 2025. How those pieces fit together is in REPS, cost segregation, and the 2026 excess business loss cap.

REPS also changes the income side. Net income from a nonpassive rental can't absorb passive losses from your other investments. For the 3.8% net investment income tax, there is a safe harbor for a real estate professional who participates more than 500 hours a year in a rental real estate activity. If you made the election below, all your rentals count as one activity. Rental income that falls in the safe harbor is treated as business income, and nonpassive business income isn't subject to that tax (Treas. Reg. Section 1.1411-4(g)(7)).

The two REPS tests

Both tests apply every year, and one person has to pass both:

More-than-half test. More than half of the personal services you perform in all trades or businesses 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 (IRC Section 469(c)(7)(C)). Three rules decide whose hours count and which hours count:

W-2 work. Hours you work as an employee don't count as real estate hours unless you own more than 5% of the employer (Section 469(c)(7)(D)(ii)). Your W-2 hours still go into the total for the more-than-half test.
Investor time. Reviewing statements, monitoring finances in a non-managerial role, and preparing summaries for your own use don't count unless you are directly involved in day-to-day management or operations (Temp. Treas. Reg. Section 1.469-5T(f)(2)(ii)).
Spouses. On a joint return, one spouse has to pass both tests alone. Spouses can't combine hours to reach 750 or to pass the half test (Section 469(c)(7)(B)).

For a line-by-line list of which hours count and which don't, see what counts toward real estate professional hours.

Why a full-time job usually rules out REPS

The more-than-half test is the one that stops most people with a full-time job. 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 works for a household where one spouse runs the rentals and doesn't have another full-time job. Our article on spousal REPS walks through that setup. If both spouses work full time, look at the short-term rental rules or the $25,000 allowance below. For the full picture, read why rental losses don't offset your W-2.

Material participation: the second step

Passing the REPS tests isn't the end. You also have to materially participate in each rental activity. You materially participate in an activity if you meet any one of seven tests in Temp. Treas. Reg. Section 1.469-5T(a):

You participate for more than 500 hours during the year.
Your participation is substantially all the participation in the activity by anyone, including people who aren't owners.
You participate for more than 100 hours, and no one else participates more. That includes a property manager.
The activity is a significant participation activity, and your hours across all such activities total more than 500.
You materially participated in the activity in any five of the preceding ten years.
The activity is a personal service activity, and you materially participated in any three preceding years.
Based on all the facts and circumstances, you participate on a regular, continuous, and substantial basis. This test requires more than 100 hours. It isn't available if anyone else is paid to manage the activity or spends more hours managing it than you do.

At this step, your spouse's hours count with yours (Section 469(h)(5) and Temp. Treas. Reg. Section 1.469-5T(f)(3)). That's true even if your spouse isn't the one who qualified. 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.

Each rental is a separate activity unless you make the election below. If you own several properties and use a manager, meeting one of these tests for every building is hard. The election solves that problem.

The election to treat all rentals as one activity

A qualifying taxpayer can elect to treat all interests in rental real estate as a single rental real estate activity (IRC Section 469(c)(7)(A), Treas. Reg. Section 1.469-9(g)). You then test material participation once, for the combined activity. With the election, 110 hours on each of five rentals is 550 hours on one activity, which passes the more-than-500-hour test. Exactly 500 hours would not.

What it covers. All of your interests in rental real estate. You can't pick some rentals and leave others out.
How to make it. Attach a statement to your original return for the year. The statement has to say you're a qualifying taxpayer for the year and that you're making the election under Section 469(c)(7)(A) (Reg. Section 1.469-9(g)(3)). Listing every rental on one Schedule E is not an election. The Tax Court has said so, citing Trask v. Commissioner, T.C. Memo. 2010-78.
How long it lasts. The election binds you for the year you make it and for every later year you qualify, even after a year when you don't.
How to revoke it. You can revoke only in a year when your facts and circumstances have materially changed, or in a later year while they stay changed. Revoke with a statement on your original return that explains the change. You don't need IRS consent. A year where the election is simply less helpful doesn't count as a material change.
If you missed it. Rev. Proc. 2011-34 gives a late-election path for taxpayers who meet its conditions, including having filed consistently as if the election had been made.
A trade-off at sale. Because all your rentals are one activity, selling one building isn't a disposition of your entire interest in the activity. That can matter for losses suspended from years you didn't qualify.

This election isn't the "appropriate economic unit" grouping in Treas. Reg. Section 1.469-4. That rule is a different regime for grouping business activities. The REPS election is its own statement under Section 1.469-9(g). For the statement itself, sample wording, late relief, and when not to elect, see how to make the REPS grouping election.

Reporting REPS on your return

If you qualified, report rentals you materially participated in as nonpassive and complete line 43 of Schedule E (IRS Publication 925). Losses suspended from years before you qualified are treated under the former passive activity rules. They can offset income from that same rental and otherwise stay suspended until you have passive income or sell.

If you don't qualify: the $25,000 allowance

If you actively participate in a rental and own at least 10% of it, you can deduct up to $25,000 of rental losses against other income under Section 469(i). Active participation is a lower bar than material participation. Approving tenants, setting rents, and approving repairs is usually enough. The allowance phases out by 50 cents for each dollar of modified AGI above $100,000, so it's gone at $150,000. These amounts aren't indexed for inflation.

Married couples filing separately get $12,500, phasing out between $50,000 and $75,000, but only if they lived apart all year. If you lived together at any time during the year and file separately, you get no allowance. California allows the same $25,000 allowance with the same phase-out.

California doesn't follow REPS

California didn't adopt Section 469(c)(7). For California, all rental activities are passive, and the federal election has no effect on the state return (FTB 2025 Instructions for Form FTB 3801). So a loss that's nonpassive on your federal return is usually still passive on your California return. You track it on Form FTB 3801 and carry it forward until you have passive income or sell. California also doesn't allow federal bonus depreciation, so the California loss is usually smaller in the early years anyway.

For a Los Angeles investor, this is the most important point on the page. REPS helps on the federal return only.

Short-term rentals: a different path

Some short-term rentals aren't rental activities under the passive rules at all, so they don't need REPS:

Average stay of seven days or less. The activity isn't a rental activity (Temp. Treas. Reg. Section 1.469-1T(e)(3)(ii)(A)).
Average stay of 30 days or less, with significant personal services. The same result applies if you, or someone on your behalf, provide significant personal services (Section 1.469-1T(e)(3)(ii)(B)). Routine repairs, cleaning common areas, and trash collection don't count toward that. Hotel-type services such as daily housekeeping or meals can.

Either way, the exception only changes the starting point. You still have to materially participate for the losses to be nonpassive. Your spouse's hours count toward that. See our short-term rental strategy for the numbers and the City of Los Angeles home-sharing rules.

Documentation: the part that fails audits

The IRS doesn't require a particular log format. The regulations allow participation to be shown by any reasonable means (Temp. Treas. Reg. Section 1.469-5T(f)(4)). The Tax Court is strict on credibility, though:

It rejects ballpark estimates (Moss v. Commissioner, 135 T.C. 365 (2010)).
It cuts inflated logs (Hairston v. Commissioner, T.C. Memo. 2019-104).
It throws out on-call time (Mirch v. Commissioner, T.C. Memo. 2025-128).

Keep a record as you go. Each entry should show the date, the actual time spent, who did the work, which property or business it was for, what you did, and a document that backs it up. Track your other work hours too, because the half test compares the two. For what to record and what the Tax Court keeps rejecting, read how to keep a REPS time log that holds up in an audit.

If REPS is disallowed

If the IRS disallows REPS, the losses go back to passive and are suspended, not erased. You owe the tax the loss had offset, plus interest. A 20% accuracy-related penalty can apply on top of that (IRC Section 6662).

How we help

REPS and material participation analysis before the year ends, so you know how many hours you still need
Drafting the election statement, and checking whether late-election relief applies if it was missed
A time-log format you can keep during the year
Short-term rental review: average stay, services, and material participation
Federal and California results side by side, including the excess business loss cap and a cost segregation study
Passive loss tracking and release when a property is sold
Audit support built on the records you kept

REPS is one of the most valuable positions in real estate tax. It's also one investors often lose, because they claim it without the hours or the records. If you or your spouse might qualify, book a consultation before year end, while there's still time to change the hours.

Real Estate Professional Status & Passive Losses