Introduction
Real‑Estate Professional Status (REPS) can transform how you handle rental losses, depreciation, and Net Investment Income Tax (NIIT). In 2025, tightened IRS rules under OBBB reforms make accurate documentation and strategic planning more critical than ever.
This guide explains the 750‑hour & >50 % tests, best practices for record‑keeping, using REPS to unlock cost‑seg losses, a script for talking to your CPA, and key audit risks.
750-Hour & >50% Tests Explained
The IRS allows significant tax benefits if you’re classified as a real estate professional under IRC Section 469. This status lets you deduct real estate losses against other types of income like W-2s or business income but only if you pass two tests:
Test 1: 750-Hour Requirement
You must perform at least 750 hours per year of services in real property trades or businesses. That includes tasks like:
- Managing tenants
- Renovation oversight
- Marketing your rental
- Negotiating leases
- Reviewing and signing contracts
Note: Work must be direct. Simply owning rental properties is not enough.
Test 2: More Than 50% of Your Time
More than half of all personal service hours you work in a year must be in real estate activities. If you have another job (W-2), and that takes 1,000 hours/year, you’ll need over 1,000 hours in real estate to qualify.
You must also materially participate in each rental activity or file an election to treat all rentals as a single activity.
What Doesn’t Count
- Travel to properties
- Research or education
- Passive investing
- Hours performed by a spouse (unless they qualify separately)
Quick Breakdown of REPS Tests
| Test | Requirement | Notes |
| 750-Hour Test | ≥ 750 hours/year in real estate services | Must be documented |
| >50% Test | Real estate hours > 50% of total work | Includes only personal service hours |
| Material Participation | Must materially participate in each activity | Or file aggregation election |
Documentation Best Practices
The IRS doesn’t take your word for it. If you claim REPS, you need a paper trail. Here’s how smart investors are documenting in 2025.
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Use a Time-Tracking App
Apps like Toggl, Everhour, or Timeular help you log activities in real time. Include:
- Date
- Property name
- Task performed
- Time spent
-
Keep a Narrative Summary
Write a short summary each week or month explaining what you did. Example:
“July 5, 2025 – Spent 4 hours screening tenants for Dallas duplex; reviewed 8 applications, conducted 3 phone interviews, and created lease drafts.”
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Save Emails, Contracts, and Reports
- Lease agreements
- Property management statements
- Texts or calls with vendors
- Receipts and bank statements
These can back up your logged hours.
-
Make the Aggregation Election
If you own multiple rentals, file the “Aggregation Election” (Reg. §1.469-9(g)) with your return. This lets you combine hours across properties.
Audit-Proofing: What the IRS Wants to See (IRS Cost Seg ATG, Feb 2025)
The IRS’s updated Cost Segregation Audit Techniques Guide (Feb 6, 2025) emphasizes:
- Engineer-prepared reports
- Time-stamped records
- Support for assumptions (e.g., square footage, useful lives)
Using a CCSP-certified firm for your cost-segregation study real estate report is now essential.
How REPS Unlocks Cost-Seg Losses
Here’s where REPS gets powerful. Once qualified, you can unlock immediate write-offs using cost segregation and bonus depreciation.
What’s Cost Segregation?
A cost-segregation study breaks your property into parts:
- 5-year assets (appliances, carpet)
- 15-year assets (landscaping, paving)
- 39-year assets (structure)
The goal is to reclassify as much as possible into short-life categories that can be depreciated faster.
Enter OBBB: 100% Bonus Depreciation Returns
In January 2025, the One Big Beautiful Bill (OBBB) reinstated 100% bonus depreciation for all qualified properties placed in service after Jan 19, 2025 (Reuters, Jul 21 2025).
This means:
- You can write off the full cost of short-life assets in year one
- Massive tax deductions immediately
Bonus Depreciation Illustration
| Description | Value |
| Purchase Price (building only) | $1,000,000 |
| Short-life assets via cost seg | $300,000 |
| Bonus Depreciation (100%) | $300,000 |
| Tax Savings (Assuming 37% bracket) | $111,000 |
Result: You can deduct $111,000 against your W-2, 1099, or business income—as long as REPS applies.
Without REPS? That loss gets suspended and carried forward.
Pro Tip:
Looking for bonus depreciation–eligible property? Consider newer NNN property for sale or 1031 exchange properties for sale in cities like:
Many of these listings qualify for cost segregation studies and accelerated depreciation.
CPA Conversation Script
Talking to your CPA about REPS can be intimidating. Here’s a sample script:
You: “Hey, I’ve tracked over 850 hours this year in real estate activities, and that’s more than half of my total work time. I’ve made the aggregation election for my rentals.”
CPA: “Okay, and have you materially participated in each property?”
You: “Yes. I have logs, calendars, and receipts for each. Plus, I had a cost segregation study real estate report prepared for my [property name], and it identifies $320,000 in 5- and 15-year assets.”
CPA: “Are those bonus depreciation–eligible?”
You: “Yes, placed in service after Jan 19, 2025, under OBBB. I’d like to apply 100% bonus depreciation to offset my self-employment income.”
Audit Risk Factors
Understand red flags to avoid unwanted scrutiny:
- Back‑dated Logs: Creating entries after year‑end.
- Batch Entries: Logging hours in large chunks without detail.
- Non‑Real‑Estate Activities: Counting time spent on unrelated tasks.
- No Third‑Party Records: Lacking emails, invoices, or contracts.
| Red Flag | Risk Level | Mitigation |
| Batch‑entered hours | High | Record daily in a timestamped tool |
| Mixing personal tasks | Medium | Use separate calendar categories |
| Lack of supporting emails | Medium | Save all service–confirmation emails |
Also, don’t forget to consult your CPA before filing. A good tax advisor can help position your strategy to minimize red flags and document intent.
Frequently Asked Questions
How many hours do I need to work in real estate to qualify for REPS?
You need to meet both:
- At least 750 hours annually
- More than 50% of your total working hours in real estate
What if I have a full-time W-2 job?
It’s very hard to qualify unless your W-2 hours are part-time and your real estate hours exceed them. IRS has denied REPS status in many similar cases.
Can I include my spouse’s hours?
Only if your spouse is the one claiming REPS. Spouses’ hours don’t combine unless both are qualifying individually.
Can I buy a NNN property and still qualify?
Yes. If you materially participate. However, most NNN lease deals are passive unless you manage them directly. Ask about DST 1031 listings under $1M for hands-free investing instead.
Can I qualify for REPS if I have a full-time W-2 job?
Yes, but it’s difficult. You must spend more hours in real estate than your W-2 job and still meet the 750-hour requirement. For example, if you work 1,800 hours at your job, you’d need 1,801+ hours in real estate to qualify. This is rare and will likely be challenged in an audit, so meticulous documentation is essential.
What kinds of activities count toward the 750-hour test?
Qualifying activities include:
- Managing tenants
- Renovations and repairs
- Property acquisitions or sales
- Advertising and marketing
- Lease negotiations
- Bookkeeping for real estate
- Site inspections (excluding commute)
- Coordination with contractors
Passive activities like reading real estate books or investor webinars do not count.
Conclusion
In 2025, qualifying for real estate professional status isn’t just a tax trick, it’s a strategy. With the return of 100% bonus depreciation under OBBB and access to engineering-backed cost-segregation studies, REPS can help you slash taxable income while building long-term wealth.
But the IRS is watching. Stay organized. Log your hours. Talk to your CPA using the right language. And always buy bonus depreciation–eligible property with proper guidance.
Whether you’re eyeing a triple net (NNN) 1031 exchange or aiming to unlock passive net-lease income, REPS could be your key to financial freedom.
DISCLAIMER
I am not a CPA, attorney, broker-dealer, or investment adviser. This content is for general education and must not be relied upon for tax, legal, or accounting advice. Always consult your licensed professional. Federal and state rules change frequently; info may become outdated. Circular 230 Notice: Nothing here is intended for, nor can it be used for, avoiding U.S. tax penalties.
Advertising Disclosure. Posts may reference services offered by AMC Real Estate Investment Services and affiliates, including 1031DealHub.
Forward-Looking Statements. Any opinions or projections are based on current data and may change without notice.
Ready for passive income? Visit https://1031dealhub.com/ to browse NNN 1031‑eligible properties now.
