What is Real Estate Professional Status (REPS)
If you’re in real estate you should know what REPS means. What is it, why should you care, and how to qualify & maintain reps.
To qualify for real estate professional status with the IRS, you need to meet certain criteria outlined in the tax code. By qualifying, you can deduct rental real estate losses from your non-passive income (AKA active income like W-2 wages or commissions from your brokerage), which can be beneficial for tax purposes. Here are the key requirements to meet the real estate professional status:
Time Test: You must spend more than 50% of your total working hours during the tax year in real property trades or businesses in which you materially participate. This means you must be actively involved in real estate-related activities, such as property management, acquisitions, leasing, or real estate brokerage. Example, you work 2000 hours in one year, 1001 need to be in real estate.
Material Participation: You need to meet one of the following conditions regarding material participation in real estate activities:
a. You participate in the activity for more than 750 hours during the tax year.
b. Your participation in the activity constitutes substantially all the participation in that activity by anyone, including non-owners.
c. You participate in the activity for more than 500 hours during the tax year, and your participation is more than anyone else's.
Regular and Continuous: Your involvement in real estate activities must be considered regular and continuous. This means you should be consistently engaged in real estate activities throughout the year, rather than randomly.
It's important to mention that being a licensed real estate professional is not a requirement to qualify for this status. However, having a real estate license can show your involvement in the industry.
To establish your qualification for real estate professional status, it's important to maintain detailed records of your time and activities related to real estate throughout the year. This documentation will be essential if the IRS requests verification. You will need a time log to prove your hourly activities.
As tax laws can be complex, it's recommended to consult with a tax professional or CPA who specializes in real estate to ensure you meet all the requirements and properly claim your deductions. Looking through the tax code can be a headache, leave it to a professional. I prepare tax returns in Irvine, CA. Contact us today to begin your tax saving strategy.