Real Estate Professional Status (§ 469(c)(7))

Rental real estate is per se passive under § 469(c)(2), regardless of participation, so rental losses ordinarily cannot offset active income. Real Estate Professional Status (REPS) under § 469(c)(7) is the statutory exception.

The two-step structure

This is the most misunderstood part: qualifying as a real estate professional removes the per se passive label, it does not by itself make losses non-passive. After qualifying, the taxpayer must still materially participate in the rental activity. Necessary, but not sufficient.

The two-part test

Under § 469(c)(7)(B), the taxpayer must satisfy both: (1) more than half of personal services in all trades or businesses for the year are in real property trades or businesses in which the taxpayer materially participates; and (2) more than 750 hours of services in real property trades or businesses. A taxpayer with a full-time non-real-estate job almost always fails prong one.

The aggregation election

Absent an election, material participation is tested separately for each property, an near-impossible standard for a multi-property investor. Treas. Reg. § 1.469-9(g) elects to treat all rental real estate interests as a single activity. File it with the return; missing it is a common, costly error (though relief is sometimes available).

Documentation and the spousal rule

The hours tests demand contemporaneous records; reconstructed logs fare poorly. For the personal-services tests, each spouse's hours are counted separately, the 750-hour test cannot be met by combining spouses. Once REPS is established, however, a spouse's hours can count toward material participation.