If you’re a high-income investor, gaining real estate professional status (REPS) is a powerful tax tool. Real estate professional status allows you to convert otherwise passive losses to deductible ordinary losses. This can save you a lot of money on your taxes.
So, what exactly is REPS, and how can you qualify for it? REPS is a special tax designation that allows you to treat your rental income and losses from real estate investments as if you were running a business. To qualify for it, you must meet two tests: the material participation test and the 500-hour test. The material participation test requires that you participate in the management or operation of the property in a meaningful way.
The 500-hour test mandates that you spend at least 500 hours per year working on your rental properties. If you meet both tests, you can claim real estate professional status and deduct your rental losses from your other income. This can be a huge savings on your adjusted gross income (AGI) come tax time.
An individual is treated as materially participating in an activity if he or she meets one of the following seven tests:
- The individual participates in the activity for more than 500 hours during the tax year;
- The individual’s participation in the activity for the tax year constitutes substantially all of the participation in such activity of all individuals (including individuals who are not owners of interests in the activity) for such year;
- The individual participates in the activity for more than 100 hours during the tax year, and such individual’s participation in the activity for the tax year is not less than the participation in the activity of any other individual (including individuals who are not owners of interests in the activity) for such year;
- The activity is a significant participation activity for the tax year, and the individual’s aggregate participation in all significant participation activities during such year exceeds 500 hours;
- The individual materially participated in the activity for any five tax years (whether or not consecutive) during the 10 tax years that immediately precede the tax year;
- The activity is a personal service activity (i.e., it involves the performance of personal services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, or consulting or in any other trade or business in which capital is not a material income-producing factor), and the individual materially participated in the activity for any three tax years (whether or not consecutive) preceding the tax year; or
- Based on all of the facts and circumstances, the individual participates in the activity on a regular, continuous, and substantial basis during such year (Temp. Regs. Sec. 1.469-5T(a)).
Think it is too hard? Think again – get in touch today to find out how we can help you achieve REP today!!
