How to Prove Your Real Estate Professional Status
- Rick Ruberg
- Oct 1
- 4 min read
I'm going to share something with you that a lot of new investors often miss.
It's called Real Estate Professional Status (REPS), and honestly... As far as the IRS is concerned, it all comes down to two critical elements: material participation and time tracking.
I know, I know. Time tracking sounds about as exciting as watching paint dry. But stick with me here.
What is Real Estate Professional Status?
Real Estate Professional Status is basically the IRS saying: "Okay, you're legit. You're not just dabbling in real estate, you're a pro."
It's a special tax classification under IRC Section 469(c)(7) that flips the script on how your rental activities are treated. Instead of being stuck as "passive" where your losses can only offset other passive income, you get to play in the big leagues.
REP Status can offset your W-2 income, your business income, whatever. We're talking real, substantial tax savings.
REPS is the key for cost segregation to actually work its magic. Now you're accelerating hundreds of thousands in depreciation AND using it to offset your active income.
Talk about a one-two punch!
The Two-Part Test for REPS
To qualify as a real estate professional, you must satisfy both prongs of a two-part test:
More Than 50% Requirement
More than half of your personal services performed during the year must be in real estate. This includes development, construction, rental, management, brokerage, and other real estate activities.
750-Hour Requirement
You must perform more than 750 hours of services in real property trades or businesses during the year. These hours must be documented and substantiated.
Both requirements must be met. If you work 2,000 hours annually in real estate but also work 2,500 hours in an unrelated field, you won't qualify because real estate doesn't represent more than half of your working time.
Here's where you claim Real Estate Professional Status 👇
That little box 43 in Form 1040/Schedule E, Part 2. If it has any number in it, positive or negative, your return gets flagged.
Now, just because you get flagged doesn’t automatically mean you’re facing an audit. But if the IRS does decide to take a closer look at your filing, here’s how to make sure you’re fully prepared.
Understanding Material Participation
Once you've achieved REPS, you must also materially participate in each rental real estate activity to treat the income as non-passive.
The IRS provides 7 tests for material participation (you only need to meet one):
You participate more than 500 hours during the year
Your participation constitutes substantially all of the participation by all individuals
You participate more than 100 hours and no one else participates more
You participate in significant participation activities for more than 500 hours combined
You materially participated in five of the prior ten years
The activity is a personal service activity where you materially participated in any three prior years
Based on all facts and circumstances, you participate on a regular, continuous, and substantial basis
For real estate professionals, the most common path is the 500-hour test for each rental activity. However, you can elect to aggregate all your rental properties into a single activity, meaning you'd only need to meet the 500-hour threshold across all properties combined rather than for each individual property.
Track Your Time
That’s the first thing the IRS will ask for: a time log showing your material participation. If you can’t prove it, they’re not going to just take your word for it. Let’s be honest, most people can’t remember what they ate for lunch yesterday, let alone what they did 14 months ago.
So be smart. Use a calendar. Or make it easy and download one of the apps in the section below.
What you don’t want to do is show up empty-handed.
What’s your go-to method for tracking hours?
Spreadsheets (manual logging)
Property management software
Time-tracking apps (Toggl, Clockify, etc.)
Calendar notes / journals
Practical Time Tracking Tools
When it comes to tracking your time, there are plenty of practical tools out there that can help, and many of them are free!
Spreadsheets (e.g., Google Sheets, Excel)
A classic choice. They’re budget-friendly and super customizable. Just set up columns for the date, task description, time spent, and property name to keep a thorough and up-to-date log.
Calendar Apps (e.g., Google Calendar)
Another great option. You can easily block out and label the time you spend on various property-related tasks right in your digital calendar.
Time Tracking Apps (e.g., REPStracker, Clockify, Harvest)
Designed for this purpose. You can start and stop a timer for specific tasks related to each property and even categorize your entries by project.
Common Pitfalls to Avoid
Failing to track time throughout the year. Trying to piece together your hours when tax season rolls around can raise some serious red flags and probably won't hold up under IRS scrutiny.
Counting personal time. Activities like learning about real estate investing, catching up on general real estate news, or even your daily commute don’t count towards your professional hours.
Overlooking the aggregation election. If you own multiple properties, be sure to file the aggregation election with your timely-filed return (including any extensions) so you can treat them as one single activity.
Spouse coordination issues. If both of you are working in real estate, typically only one can qualify as a real estate professional unless both of you meet the requirements independently.
Is REPS Worth the Effort?
For investors with significant rental losses and high ordinary income, Real Estate Professional Status (REPS) can see real tax savings.
The decision to pursue Real Estate Professional Status should be made carefully, ideally with guidance from a CPA or tax advisor who understands the nuances. But if you're already spending significant time in real estate activities, the tax benefits can make the administrative efforts worthwhile.
Start tracking today. Your future tax return depends on it.
Preparation is everything.
Comments