The two tests — and why records matter
To qualify as a real estate professional and deduct rental losses as non-passive, you must pass two tests: (1) more than 750 hours per year in real property trades or businesses in which you materially participate, and (2) more than 50% of your total personal service hours are in those activities.
The IRS audits this status regularly and requires contemporaneous records — not a log reconstructed at tax time. The Tax Court has disallowed real estate professional status in many cases where records were created after the fact, contained suspiciously round numbers, or couldn't be corroborated by third-party evidence.
What a good log looks like
A qualifying log shows: date, property address (or description of the activity if not property-specific), activity performed (showings, tenant calls, contractor supervision, leasing negotiations, bookkeeping), and hours worked. Use a calendar, spreadsheet, phone log, or a time-tracking app.
Corroborate the log with objective evidence: email timestamps, text messages with tenants and contractors, mileage records, showing logs from real estate software, receipts for materials purchased. An audit examiner will compare your log against emails with dates and times — consistency is the key.
Grouping election and material participation
If you own multiple properties, making the grouping election lets you treat all rentals as a single activity, combining all hours toward the material participation tests. Without it, you must meet the tests for each property separately — typically requiring 500 hours per property.
The standard is seven tests, the most common being the 500-hour test (500 hours in the activity during the year) or the 100-hour / no-one-else test (100 hours, and no other individual contributes more). Document not just your own hours but also how many hours your spouse, property manager, or other parties worked — the comparison matters for the no-one-else test.
Frequently asked questions
Can I use a reconstructed log?
The Tax Court has been skeptical of retroactively created logs. Contemporaneous records — created at the time of the work — are required. A reconstructed log may not survive audit.
Do management company hours count toward my 750?
No. The test counts hours you personally participate, not hours others work. Management company hours count against you for the "no one else works more" test.
What if my spouse is the real estate professional, not me?
For a married couple filing jointly, the real estate professional tests must be met by one spouse individually — you cannot combine spouses' hours for the 750-hour test. Each must qualify independently.
Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.