Real estate professional (REPS)
For people whose main work is real estate.
- More than 750 hours a year in real estate businesses
- More than half of all your working hours
- Works for long-term and short-term rentals
- Hard to reach with a full-time job
IRS guide
The IRS rules for REPSand the STR loophole.
What each path requires, what counts as an hour, and the records to keep, in plain English. Each rule links to the regulation behind it.
By Carlos LourençoReal Estate Investor · Founder, REP HelperReviewed Educational, not tax advice. Confirm your situation with a CPA.
Start here
Two ways to deduct rental losses against your other income.
Rental losses are normally passive: they only offset passive income. Two routes change that. Which one fits depends on how much of your working time goes to real estate, and how your rentals are used.
Short-term rental (STR) loophole
For owners of rentals with short stays.
- Average guest stay of 7 days or less
- You materially participate in the rental
- No 750-hour or 50% test
- Works alongside a full-time job
Path 1 · REPS
REPS: pass two tests, then materially participate in your rentals.
You qualify as a real estate professional for a tax year when you pass both tests below. IRC §469(c)(7)(B)
750+
More than 750 hours
of services in real property trades or businesses in which you materially participate: development, construction, acquisition, rental, operation, management, leasing or brokerage.
>50%
More than half your working time
Of all the hours you work in any job or business, more than half must be in those real estate businesses. With a 2,000-hour job, that means more than 2,000 real estate hours.
Hours you work as an employee only count toward either test if you own more than 5% of the employer. IRC §469(c)(7)(D)(ii)
Then, the step people miss
Each rental must also pass a material participation test.
REPS only removes the automatic “passive” label from rentals. Each rental is still passive unless you materially participate in it. Most investors with several rentals file an election to treat all their rentals as one activity, so the hours add up across properties. The election is made on your return and is generally binding for later years. IRC §469(c)(7)(A) · Treas. Reg. §1.469-9(g)
Path 2 · STR loophole
The STR loophole: short stays, plus material participation.
A rental with an average guest stay of 7 days or less is not a “rental activity” under the passive activity rules. Treas. Reg. §1.469-1T(e)(3)(ii)(A) If you also materially participate, its losses can offset your W-2 and other income, with no 750-hour or 50% test.
Stays of 30 days or less can also qualify when you provide significant hotel-like services, which is rare for typical vacation rentals. §1.469-1T(e)(3)(ii)(B)
≤ 7
Average stay, in days
Total days rented divided by the number of separate stays during the year. 120 nights over 32 bookings is an average of 3.75 days.
The three tests most STR owners use
500+
More than 500 hours
You work on the rental for more than 500 hours in the year. The clearest test, and the one dedicated operators use.
§1.469-5T(a) · Test 1
100+
More than 100 hours, and no one works more
You put in more than 100 hours, and no other individual puts in more hours than you, including people who are not owners.
§1.469-5T(a) · Test 3
All
Substantially all of the work
Your work is substantially all of the work done on the rental by everyone, including people who are not owners.
§1.469-5T(a) · Test 2
Cleaners, co-hosts and managers. The 100-hour and “substantially all” tests compare your hours with everyone who works on the rental. A property manager or co-host can easily out-work you. How hired cleaners and contractors count is debated, so decide which test you rely on with your CPA, and track your crew's hours too.
Both paths
Material participation: pass any one of seven tests.
Both paths need it. The tests apply to each activity for the year, and your spouse's hours count with yours. IRC §469(h) · Treas. Reg. §1.469-5T(a)
| Test | You pass when | Who usually relies on it |
|---|---|---|
| Test 1 | More than 500 hours in the activity during the year. | Hands-on owners, STR operators |
| Test 2 | Your participation is substantially all of the participation of all individuals, including non-owners. | Self-managers with little outside help |
| Test 3 | More than 100 hours, and not less than any other individual, including non-owners. | STR owners with a light crew |
| Test 4 | The activity is a significant participation activity (more than 100 hours), and all of yours together exceed 500 hours. | Several small businesses (not rentals) |
| Test 5 | You materially participated in any 5 of the 10 preceding years. | Long-time operators |
| Test 6 | A personal service activity you materially participated in for any 3 earlier years. | Professional practices (not rentals) |
| Test 7 | Facts and circumstances: regular, continuous and substantial participation, more than 100 hours. | Last resort; weakest in audits |
Highlighted: the three hour-based tests most rental owners use.
Hours
What counts as an hour, and what usually doesn’t.
Count the work you personally do to run your rentals. Time spent watching them as an investor doesn’t count.
Usually counts
- Finding, screening and talking with tenants and guests
- Doing or overseeing repairs, maintenance and turnovers
- Hiring, scheduling and checking on contractors and cleaners
- Collecting rent, paying the property’s bills and handling leases
- Setting prices, managing listings and bookings
- Driving to your properties to do any of the above
Usually doesn’t
Investor-type work
Reviewing statements or reports, preparing analyses for your own use, monitoring finances without managing day to day. §1.469-5T(f)(2)(ii)(B)
Work others do for you
Your manager’s, co-host’s or crew’s hours aren’t yours, and can count against you in some tests.
General education
Courses, books and podcasts about real estate that aren’t tied to running your rentals.
Employee hours (REPS)
Time as an employee of a real estate company, unless you own more than 5% of it. §469(c)(7)(D)(ii)
Married filing jointly
How spouse hours work: one rule for each test.
Spouses are treated differently for the two parts of the rules, which is where many couples go wrong.
REPS tests
Hours do not combine.
On a joint return, one spouse must pass both the 750-hour and the 50% test alone. A spouse who works full time in real estate can qualify the couple. IRC §469(c)(7)(B), flush language
Material participation
Hours do combine.
Your spouse's work on a rental counts with yours, even if only one of you owns it. IRC §469(h)(5)
Proof
Keep records the IRS accepts.
You can prove your hours by any reasonable means, such as calendars, appointment books or narrative summaries. Treas. Reg. §1.469-5T(f)(4)
In practice, the logs that hold up are written when the work happens, name the property and the task, and point to evidence. The Tax Court has repeatedly rejected hour totals rebuilt from memory at tax time.
- Date and time
- Tue, Oct 14 · 9:00–10:30 AM
- Property
- 888 Lucky Ct (short-term rental)
- What you did
- Met plumber, approved water heater replacement, checked unit before next guest
- Hours
- 1.5
- Logged
- Oct 14, 10:41 AM
Plumber’s confirmation email attached
Go deeper
REPS deep dive
The 750-hour and 50% tests, spouse rules and common mistakes.
Material participation tests
All seven tests with examples, and the grouping election.
STR tax strategy
The 7-day rule, cost segregation and STR audits.
REPS simulator
Project your hours to year-end against both tests.
STR simulator
See which material participation test you are on track to pass.
Avoid a REPS audit
The return patterns that draw IRS attention.
Track it as you go
Know where you standon every test.
REP Helper tracks the 750-hour and 50% tests and material participation for each property as you log, and keeps the evidence with every hour.