The Two-Part IRS Test
Real estate professional status (REPS) is an IRS designation under Section 469 that lets qualifying taxpayers treat rental real estate losses as nonpassive, meaning those losses can offset commission income, W-2 income, or other active earnings instead of being trapped by the passive activity loss rules. To qualify, you must meet both parts of the test in the same tax year:
- More than 750 hours of work in real property trades or businesses in which you materially participate.
- More than half of all the personal service hours you worked in every trade or business that year must come from real property activities.
Both tests use hours logged in real property trades or businesses, defined by the IRS as development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage.
Which Activities Count
Brokerage is explicitly listed, so time spent as a licensed real estate agent or broker showing homes, negotiating contracts, prospecting, and closing deals counts toward your hours. If you also own rental property, hours spent finding tenants, screening applicants, negotiating leases, coordinating repairs, and overseeing property managers count too, as long as you can show material participation rather than passive oversight.
Other activities that count when you materially participate:
- Time spent on construction or renovation of property you own or develop
- Time negotiating the purchase or sale of investment property
- Property management tasks you personally perform, even if you also hire a manager
- Time spent as a real estate developer or builder
What Does Not Count
The IRS draws a hard line between operating a real property trade or business and simply investing in one. Hours do not count if they are purely investor-type activities, such as reviewing financial statements or operating reports, unless you are also involved in day-to-day management. Studying for a license, commuting between listings, and time spent as a passive limited partner in a real estate fund generally do not count either.
Another wrinkle: your brokerage business and your rental properties are usually treated as separate trades or businesses for the material participation test unless you file a grouping election under Treasury Regulation 1.469-9(g). Without that election, you need to separately prove material participation in your rental activity even after you clear the 750-hour and more-than-half thresholds using brokerage hours.
Why Agents Should Care
Many agents also own rental property as an investment. If you spend most of your working hours in brokerage and also self-manage a rental or two, REPS can turn what would otherwise be passive rental losses (capped and carried forward) into current-year deductions against your commission income. The catch is documentation: the IRS expects contemporaneous logs of dates, hours, and specific tasks, not a rough end-of-year estimate. A calendar entry saying "showings" repeated fifty times will not survive an audit; you need detail tied to real activity.