Definition
Real Estate Professional Status is a tax classification that can let a taxpayer deduct rental real estate losses, including depreciation, against ordinary income such as wages or business profit.
How It Works
Rental losses are normally passive and can only offset passive income. REPS removes that restriction for those who qualify. Qualification requires spending more than 750 hours per year in real property trades or businesses, and more time on those activities than on any other work. Material participation in the rental activity is also required.
Example
A spouse who works full time managing the couple's rental portfolio qualifies as a real estate professional, allowing depreciation losses to offset the other spouse's high W-2 income on their joint return.
When It Works Best
It works best when one spouse can genuinely meet the hour tests, freeing large depreciation deductions, often amplified by cost segregation, to offset household ordinary income.
Who It Applies To
Taxpayers, or their spouses, who work primarily in real estate. A full-time employee in another field generally cannot meet the tests personally.
Watch-Outs
The status is heavily audited. Contemporaneous time logs are essential, the 750-hour and "more than any other work" tests are strict, and misunderstanding them is one of the most common and costly errors in real estate tax planning.
