Real Estate Professional Status: How the 750-Hour Rule Unlocks Major Tax Savings

Real Estate Professional Status: How the 750-Hour Rule Unlocks Major Tax Savings

If you own rentals, the IRS normally labels every dime of profit—and, more painfully, every loss—as passive. That means rental losses can’t offset W-2 income, bonuses or business profits. But Congress carved out one narrow escape hatch: Real Estate Professional Status (REPS) under §469(c)(7). Qualify, and your rental gains become non-passive while your depreciation-driven losses can slash ordinary income. To qualify as a real estate professional for tax purposes, you must meet certain criteria set by the Internal Revenue Service (IRS). Specifically, you must meet both the “material participation” test and the “more than one-half” test.

The Two Core Tests

The 50 % (“More-Than-Half”) Test

Rule: More than 50 % of all personal-service hours you work in the year must be in real-property trades or businesses in which you materially participate.

The 750-Hour Test

Rule: You must log ≥ 750 hours in those same real-property activities during the tax year. Spousal hours don’t stack—pick one spouse.

Fail either test and the door slams shut for the year.

Passing the Material-Participation Hurdle

Even after you clear the two headline tests, each property is still passive unless you meet one of seven material-participation standards from IRS Pub 925: IRS

• 500-Hour Test – The safe harbor most pros rely on.

• Substantially All – You did nearly everything.

• 100-Hour & More Than Anyone Else – Works for hands-on landlords with third-party help.

• Four other niche tests (five-of-ten-year, facts-and-circumstances, etc.).

Shortcut: File the once-in-a-lifetime aggregation election (Reg. §1.469-9(g)) so all rentals are treated as one activity. That way you only need 500 hours total instead of per property. TaxAct

Real-World Savings Example

Jessica is a tech consultant earning $250 k W-2. She bought three rentals generating a $45 k paper loss (mostly depreciation). After hitting 820 logged hours and filing the aggregation election:

• $45 k offsets her salary → $10,800 federal tax saved (24 % bracket).

• $9 k of rental profit is NIIT-free → $342 saved.

• Total year-one savings ≈ $11,100.

FAQ’s

1. What counts toward the 750-hour rule? Tasks you personally perform that impact day-to-day operations—tenant calls, repairs oversight, bookkeeping.

2. Does commuting to properties count? Yes, travel time between properties and to suppliers is allowed if logged.

3. Can both spouses combine hours? Only the spouse claiming REPS may use their hours; the other’s don’t count.

4. How do I prove hours to the IRS? Contemporaneous logs, calendar entries, emails and receipts; avoid after-the-fact estimates.

5. Is real estate licensing required? No; you just need qualifying activities.

6. Can short-term Airbnb hosts use REPS? STRs < 7-day stays follow separate material-participation tests; REPS still applies if the two core tests are met.

7. What is the aggregation (grouping) election? A one-time statement that treats all rentals as one—filed with the return for the tax year of the election.

8. Do property managers kill my hours? They reduce the number of tasks you personally perform; keep control of high-value decisions and site visits.

9. Does REPS eliminate self-employment tax? Rental income remains passive for SE-tax purposes, so no SE tax due unless you provide substantial services.

10. What happens if I fail the tests next year? Your rentals revert to passive status prospectively; past non-passive treatment is preserved if valid.