The two-part test
Under IRC § 469(c)(7), a taxpayer qualifies as a real estate professional if: (1) more than half of their personal services in all trades or businesses during the year are in real property trades or businesses in which they materially participate, AND (2) they perform more than 750 hours of services in those real property trades or businesses.
Both tests must be met every year. Qualifying activities include: real property development, construction, acquisition, conversion, rental, operation, management, leasing, and brokerage. A W-2 employee whose employer's business is real estate can count those hours.
The material participation requirement still applies
Meeting REPS does not automatically make all rental income non-passive. You must also materially participate in each rental property. For most landlords, this means making the election to treat all rental activities as a single activity (under Reg. § 1.469-9(g)) so that hours across all properties aggregate toward the 500-hour material participation test.
Without the grouping election, each rental is evaluated separately, and you must meet material participation for each one individually — a much harder standard for multi-property owners.
Documentation is essential
The IRS frequently audits REPS claims. Courts have disallowed the status when taxpayers could not produce contemporaneous records: calendars, time logs, emails, invoices, or other documentation showing the activities and hours spent. Keep a detailed log throughout the year — reconstructing it from memory after the fact rarely survives audit scrutiny.
A spouse's hours count separately. Each spouse must individually meet both tests to qualify unless the return is filed jointly and the qualifying spouse meets the tests.
Frequently asked questions
Does a full-time W-2 employee in another field qualify as a real estate professional?
Rarely. To meet the \"more than half of personal services\" test, your real estate hours must exceed your non-real-estate work hours. If you work 2,000 hours at a regular job, you'd need more than 2,000 hours in real estate — which essentially requires real estate to be your full-time occupation.
Does REPS eliminate the passive loss rules entirely?
Only for the rental activities in which you materially participate. Rentals where you don't materially participate remain passive even if you meet REPS for other properties.
Can a spouse who does not work qualify for REPS?
Yes — a non-working spouse who devotes more than 750 hours to real estate activities and spends more than half of their working time in real estate can qualify. Joint filers can then use the losses against W-2 income.
Sources
Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.