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Real Estate Tax Strategy

Unlock Tax Advantages as a Real Estate Professional

Qualify for IRS Real Estate Professional Status (REPS), pass material participation tests, and turn depreciation and paper losses into real tax savings--legally and confidently.

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Travis Tandy CEO & President of Tandy Consulting Inc

What Is a Real Estate Professional (REPS)?

Most rental activity is passive by default. If you qualify for REPS, rental losses become non-passive and can offset W-2 wages, 1099 and business income. You may also avoid the 3.8% NIIT.

Even if you meet the 50% test and 750-hour test required to qualify as a Real Estate Professional under IRC § 469(c)(7), you must also demonstrate material participation in each rental activity. These are separate requirements—the 750-hour and 50% rules establish your status as a Real Estate Professional, but you still need to show that you materially participated in the day-to-day operations of the properties you claim active involvement in.

How You Qualify

  • 50% Test: More than half of your total work hours are in real estate trades/businesses.
  • 750-Hour Test: At least 750 hours annually in real estate activities in which you materially participate.

Married? One spouse must meet both tests independently. Hours can't be combined.

REPS CRITERIA

Why It Matters

  • Convert rental losses to non-passive and offset ordinary income.
  • Accelerate benefits using cost segregation & bonus depreciation.
  • Design a documentation system that stands up in an audit.

REPS STATUS PROS AND CONS

Material Participation: The Third Requirement

You only need to meet one test each year. Common pathways include the 500-hour test, the 100-hour + most-hours test, or "substantially all" work on the activity.

Qualifying Activities (Count)

  • Leasing, tenant management, rent collection
  • Repairs/maintenance you perform
  • Coordinating & supervising vendors/contractors
  • Property-level bookkeeping & records
REPS 7 WAYS

Non-Qualifying (Don't Count)

  • Investor-type tasks (strategy, portfolio reviews)
  • Education/research not tied to active operations
  • Travel time (unless integral to operations)

Documentation That Works

  • Contemporaneous logs/calendars with dates, properties, hours, tasks
  • Narrative summaries tied to specific properties
  • Store artifacts (work orders, messages, invoices) alongside your log

Pro Tips

  • Consider a grouping election to test participation across rentals
  • For couples: only one spouse must qualify for REPS
  • Short-Term Rentals (STR) can be non-passive without REPS when average stay ≤ 7 days and you meet a material participation test

Income Offset Comparison

How different participation levels affect what your rental losses can offset.

Summary of passive vs. non-passive treatment and related limits.
Scenario Passive / Non-Passive What You Can Offset Limits / Requirements
Active Participation Only ($25K allowance) Passive Wages & business income (limited) Up to $25,000 deduction; phased out between $100K--$150K MAGI
Material Participation Only (no REPS; standard rentals) Passive (rental rule) Passive income only (other rentals, REITs, partnerships) No offset against W-2/active income
REPS + Material Participation Non-passive W-2, 1099, business, and portfolio income Unlimited if properly substantiated
Short-Term Rental (STR) + Material Participation Non-passive (special rule) W-2, 1099, business, and portfolio income Average stay ≤ 7 days; meet a participation test

Tip: We can help you determine the best path and set up audit-ready documentation.

What Counts Toward Your Hours? And What Doesn’t?

Activities That Count

  • Property management and oversight
  • Tenant screening, rent collection
  • Contractor supervision and repairs
  • Compliance tasks like reviewing local landlord-tenant laws
  • Managing HOAs, paying insurance and taxes
  • Handling lease renewals, evictions, and inspections

Activities That Don’t Count

  • Commuting to properties
  • Studying for real estate licenses
  • Reading general newsletters or unrelated articles
  • Reviewing deals for potential investments without active involvement
  • Investor-only oversight without operations

California Doesn’t Follow the Federal REP Rule

Even if you qualify for REP status federally, California still treats your rental activity as passive. Rental losses can’t offset W-2 or business income on your state return.


SAVE EVEN MORE!!!

Power Tax Saving Tools

Cost Segregation Study
Short-Term Rental Loophole

Estate Professional (REPS) & Material Participation Worksheet

IRC §469 | Planning aid for real property and material participation tests. Informational only--not legal or tax advice.

Real Estate Professional Status (REPS)

More than 50% of all personal services in real property trades/businesses?
Symbol form: > 50%
At least 750 hours in real property trades/businesses?
Symbol form: ≥ 750 hours

Activities & Material Participation

Enter each trade or business/rental activity. Check boxes for the seven material participation tests. For Test 4 (Significant Participation Activity, "SPA"), mark activities with ≥100 hours; the tool aggregates SPA hours to check the 500-hour threshold.

Aggregate SPA (Significant Participation Activity) hours across all marked activities ≥ 500? (Test 4)
Overall MP satisfied

Summary & Draft Documentation Checklist

  • Maintain contemporaneous logs (calendars, emails, time-trackers) showing hours and nature of work.
  • Document roles (manager vs. investor-type activity). Investor hours generally do not count.
  • For grouping elections, retain a written statement consistent with Reg. §1.469-9(g) with the return for the year of election.
  • If filing jointly, either spouse can satisfy REPS; hours may be combined for material participation.
  • This tool is for planning; confirm facts and law before relying on results.
California-specific Notice & Disclaimer. This worksheet is provided by Tandy Consulting Inc. for general informational and educational purposes only and may be considered advertising under California law. It does not constitute legal, tax, or financial advice, and use of this tool does not create a professional--client relationship. Outcomes are fact-dependent; results are not guaranteed. Information entered into this tool remains in your browser and is not transmitted unless you choose to save or share it. For advice regarding your specific situation, consult a qualified professional licensed in your jurisdiction. If you are a California resident, you may have rights under the California Consumer Privacy Act (CCPA). To make a request or for questions, contact Tandy Consulting Inc. at the email or phone listed on our website.
© Tandy Consulting Inc. -- All rights reserved.

Still Unsure If You Qualify

We'll review your current mix of hours, properties, and entity setup, and design a documentation system so your position is defensible.

  • Personalized hour-tracking & evidence template
  • Cost segregation & bonus depreciation roadmap
  • REPS vs. STR: get the best path for offsetting income
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