Got REPS?
🏘️ IRS Definition of Real Estate Professional Tax Status (2025 Update)
If you own rental properties and your income creeps past six figures 💸, you’ve probably noticed the IRS starts playing hardball with your deductions. Once your modified adjusted gross income (MAGI) hits $150,000, passive losses from rentals generally get suspended — pushed into future years where you might use them.
But there’s one big exception: qualifying as a Real Estate Professional (RE Pro) under the tax code. This status can open the door to unlimited deductions for losses on rental properties in which you materially participate.
Sounds too good to be true? Well… kinda. Because qualifying is not for the faint of heart 😅.
🚫 What a Real Estate Professional Is Not
Before we dive into the requirements, let’s clear up some common misconceptions. Many taxpayers think they qualify, but the IRS often disagrees — and they usually win 🧾.
Here are some who likely won’t qualify:
🏠 Licensed real estate agents who think their license alone qualifies them. Spoiler: it doesn’t. Having a license helps, but you still need to meet the hour and participation tests.
💼 Full-time professionals in other industries. If you already work 40+ hours a week at your day job, finding enough qualifying real estate hours is extremely tough.
🧰 Owners who delegate everything to property managers. You must materially participate, not just review statements or approve repairs.
⏱️ People who “estimate” their hours. The IRS loves documentation, not guesses. “I worked a lot” doesn’t cut it in an audit.
👉 And let’s be clear: RE Pro status only helps with rental real estate losses. It won’t magically turn your new suit 👔 or home office latte ☕ into a deduction.
🧮 The Two Major Hurdles: IRS Hour Tests
To qualify, you must pass both of these IRS tests:
📊 More than half of your personal service hours for the year must be in real property trades or businesses where you materially participate.
⏰ You must work at least 750 hours per year in those real property trades or businesses.
Here’s the tricky part — if you work a full-time job (say 2,000 hours a year) outside of real estate, you’d have to log more than that in real estate to meet test #1. Unless you’re superhuman or have a time machine ⏳, that’s nearly impossible.
Real property trades or businesses include:
🏗️ Development or redevelopment
🔨 Construction or reconstruction
🏢 Acquisition or conversion
🏡 Rental or management
🤝 Operation or brokerage (excluding those who only earn commissions)
Translation: you need to be in the trenches of real estate — not just collecting rent checks 💰.
🧾 Hurdle #2: Material Participation
Even if you hit 750 hours, those hours must be material — meaning your involvement is regular, continuous, and substantial.
The IRS provides several ways to prove material participation. Meeting just one of these is enough ✅:
⌛ You participate in 500+ hours in the activity during the year.
💪 Your participation constitutes substantially all of the activity.
💼 You participate in more than 100 hours, and no one else participates more than you.
📆 You materially participated for 5 of the past 10 years.
🔁 Based on the facts, your participation is regular and continuous.
⚠️ Note: reviewing financials or giving “managerial direction” from afar doesn’t count. And while spousal hours can combine 👫 to meet the requirement, hiring a property manager can easily disqualify you.
🕵️ The IRS Loves Logs (And Hates Vague Ones)
This is where most taxpayers lose their case 👀.
To prove RE Pro status, you need detailed, contemporaneous records of your hours — not something scribbled on a napkin in April.
Your log should include:
📅 Dates worked
🕒 Hours spent
🏘️ Property name/address
🧰 Specific tasks performed
The IRS will absolutely challenge inflated or unrealistic logs. Courts have seen claims of “midnight landscaping” 🌙 and “weekend miracles” that didn’t hold up.
And remember — this isn’t a one-time certification. You must meet the requirements every single year you claim the status 📆.
📈 Why This Matters in 2025
With the IRS expanding audit resources under new funding 💰 and focusing on high-income taxpayers, rental real estate deductions are under the microscope 🔍.
If you plan to claim RE Pro status for 2025, now’s the time to get organized:
🗓️ Track your hours from January 1 forward
📲 Use time-tracking apps or spreadsheets for accuracy
📂 Keep receipts, emails, and maintenance logs to back up your entries
Done right ✅, this designation can unlock massive tax savings. Done wrong ❌, it can trigger an audit and a hefty bill.
💡 Final Thoughts
The Real Estate Professional designation is one of the most powerful (and misunderstood) tax tools for investors.
If you’re serious about using it to offset income, build a system now to track, document, and verify your hours. A little diligence today can save you thousands come tax season 💵.
Need help figuring out if you qualify?
👉 Book a call with Lisa Brugman, EA & Associates, and get expert guidance on maximizing your real estate tax benefits — without getting burned by the IRS.
