1. The Two-Part REPS Test

Under IRC Section 469(c)(7), a taxpayer qualifies as a real estate professional if both of the following are true in a tax year: more than 750 hours are spent in real property trades or businesses, and more than 50% of all personal services performed across every job are in real property trades or businesses. Both tests must be met by the same individual. For married couples, one spouse must independently satisfy both tests.

2. What Counts as a "Real Property Trade or Business"

This includes development, construction, acquisition, conversion, rental, operation, management, leasing, or brokerage of real property. Time spent solely as an investor, such as reviewing financial statements, generally does not qualify unless accompanied by day-to-day operational or management activities.

3. Material Participation Requirement

Qualifying for REPS alone is not enough. You must also materially participate in each rental activity, or properly elect to group rental properties into a single activity, before rental losses can offset active income.

4. Worked Example

A business owner spends 900 hours actively managing four rental properties and 600 hours operating a consulting business. They satisfy both the 750-hour test and the more-than-50% test, qualifying for REPS. A $150,000 depreciation-driven rental loss can offset consulting income, potentially saving about $52,500 at a 35% marginal tax rate.

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5. REPS vs. STR Loophole: Which Fits You
 

6. State-Specific Considerations

Illinois generally follows the federal passive activity loss rules for individual taxpayers. REPS-qualified losses that reduce federal taxable income generally reduce Illinois taxable income as well.

7. Documentation Checklist

• Keep a contemporaneous time log.
• Track hours by specific activity.
• Confirm total real estate hours exceed 750 annually.
• Confirm real estate hours exceed 50% of total working hours.
• Document material participation or file a grouping election.
• Retain calendars, emails, invoices, and contractor communications.

8. Most Common Mistakes

No contemporaneous log. This is the most common audit issue.

Counting investor hours. Passive investment activities generally do not qualify.

Missing the 50% test. Meeting 750 hours alone is not sufficient.

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9. Frequently Asked Questions

Can my spouse qualify if I don't? Yes. One spouse may independently qualify, but hours cannot be combined.

Does a full-time W-2 job disqualify me? Often, though not always, because meeting the 50% test becomes difficult.

Do I need to qualify every year? Yes. REPS status is determined annually.