Investors
What is Real Estate Professional Status (REPS)?
By Steve Lockhart
The short answer
The IRS generally treats rental activity as passive, which means rental losses can only offset passive income, not your salary or business profits. REPS is the classification that can change that for people who work in real estate as their real trade or business.
Full answer
The IRS generally treats rental activity as passive, which means rental losses can only offset passive income, not your salary or business profits. REPS is the classification that can change that for people who work in real estate as their real trade or business. If you qualify, your rental losses are treated as non-passive for the tax year, which means on-paper losses, including depreciation, can reduce your overall taxable income in a way passive losses cannot.
Qualifying is not about owning properties; it is about the work. The rules require that you spend more than half of your personal service hours during the year in real property trades or businesses in which you materially participate, that those hours total at least 750, and that you materially participate in the rental activity itself. The IRS applies specific definitions for what counts as a real property business, what counts as participation, and who may count hours, and the classification has been interpreted tightly, so it is much easier to claim on paper than to genuinely meet.
This is a tax question where the margin of error is expensive, because REPS determinations rest on the facts of your hours and activity, and auditors test exactly those details. I am not a tax advisor, and I will not advise you on whether you qualify. Have a qualified CPA or tax professional who specializes in real estate review your hours, your activity, and your past filings before you rely on the status, and keep documentation of the work the tests require. Your entity structure, an LLC, a partnership, or an individual filing, interacts with the classification.
A note from Steve: nothing on this page is investment, legal, or tax advice. Markets move, and every property is different. Run your own numbers on the specific deal, and talk to your CPA and attorney before you commit.
Go a little deeper
Frequently asked
Questions investors often follow up on
Does owning rentals make me a real estate professional?
No. The classification is about hours and material participation, not ownership. A landlord who does not meet the hour tests or does not materially participate in the rental activity does not qualify under the rules, no matter how many properties they own.
Can I count time managing my own rentals?
Time spent working in a real property trade or business in which you materially participate is at the center of the test, but the IRS applies specific definitions to property management, brokerage, and rental activities, and questions of what counts are fact-specific. Confirm how your hours fit those definitions with a tax professional.
Does REPS affect how my LLC rental income is taxed?
The passive or non-passive classification applies at the individual level and interacts with how the LLC's activity flows to your personal return. Because the entity and the classification connect, the attorney and the CPA should review your structure and your status together.
The Lockhart Method
The Lockhart Method
Your Home | My Strategy | Proven Results
My strategy: we flag the tax structure early in the process and bring in a CPA who works with real estate investors, so classification decisions are made by the professional who owns them, with your records in hand. The property strategy and the tax strategy get built together, not discovered later.
Schedule a Consultation