Unlock unlimited real estate losses - How to qualify as a Real Estate Professional (REP)?
- Ryan Chapman
- Nov 19, 2025
- 4 min read
Updated: Dec 30, 2025
Target Audience: Active short-term rental owners; Passive real estate investors; Aspiring Commercial Real Estate Professionals
Legal Disclaimer: The information contained in this article is general in nature and is provided for educational and informational purposes only. It is not intended to be, nor should it be construed as, nor does it constitute tax, legal, accounting, or professional advice. Chapman CPA Services, PLLC disclaims any liability for any loss or damage resulting from the use of this information. Always consult with a qualified CPA or tax professional regarding your specific circumstances. Refer to website Terms & Conditions for full disclaimer.
How do you turn real estate from passive to non-passive with REP status?
Rental real estate is presumptively passive under IRC Section 469, meaning losses—including turbocharged depreciation from segregation—can only offset passive income. However, if you can qualify for Real Estate Professional (REP) status, then you can treat rental losses as non-passive, offsetting W-2s or business income. Given the multiple depreciation options that exist in real estate, being able to recognize losses can be a large way to accelerate tax savings. To qualify for REP status you must meet very specific IRS rules outlined below.
IRS Rules on how to achieve Real Estate Professional Status
(i.e. Your Ticket to Full Loss Deductibility)
In order to qualify as a Real Estate professional (REP), you will need to meet ALL of the following requirements:
>750 hours total work in real property trades or businesses per year, per taxpayer, with material participation per rental.
It does not count if you are an employee of a company, unless you own at least 5% of that company.
>50% of your personal services/work time must be in real estate (development, management, etc.).
If you work full time in a non-real estate job, then try to add real property activities on top, you will not qualify, because most of your time working is in your primary job.
Material participation in the activity with the loss
You must materially participate in the rental activity, which can be met by one of the following:
>500 hours spent in the rental activities creating the net loss
>100 hours AND more than anyone else
Substantially all hours worked on the rental activity
If you hire a property manager to manage the property, it will be harder to meet the material participation requirements.
To help you prove the above, make sure that you diligently maintain a hours log to show you met the requirements. You may need to maintain a log of time that others spent also, if you are going to prove that you spent more hours than anyone else.
REP status transforms your passive losses into active deductions, letting real estate losses shelter W-2 and other non-passive income. Reaching this status is the most efficient way to take advantage of those depreciation benefits (Section 179 & bonus depreciation, cost segregation, etc.).
What if I cannot qualify for REP status but want to still offset some of my ordinary income from real estate activity?
If you cannot meet REP status, there are still two options on how you can offset ordinary income with real estate losses?
Option 1: Consider the $25,000 active participation allowance. if you own at least 10% and make key decisions (e.g., approving tenants), you can deduct up to $25,000 passive losses against non-passive income (i.e. ordinary wages), phasing out above $100,000 modified AGI. It is ideal for modest portfolios but won’t cover large deductions/losses. Also, this may not work for high-wage earners given the phase-out thresholds.
Option 2: If you run your real estate activities as a short-term rentals (i.e. average stay ≤7 days) you can sidestep passive status entirely if you also provide significant services (cleaning between guests, managing correspondence, etc.), thus turning deductions as active. So if you rent AND manage an Airbnb, then you might want to consider the impacts both short term and long term, as this may be an option for you.
Option 3-ish: Self-Rental Grouping election
If you have one business that is set up to rent business space to another business, you might be able to perform a Self-Rental Grouping election to combine the activities and treat the rental activity as non-passive (i.e. active). This can be helpful when you own the building that your operating business rents from. You place that building into an LLC, then lease back to your business, which is good for asset protection. However, as these are separate businesses you now have the self-rental business (passive income/losses) and the operating business (non-passive). So, if you do not do a grouping election, you cannot deduct the passive losses (that you worked hard to get through cost segregation) against the non-passive income - thus trapping the deductions as passive losses. If you miss this election, you cannot fix/amend in a subsequent year - it must be on the original return. To claim you check a box in the tax software to group the activities, which is allowed under the treasury regulations, if you are a single economic unit based on common ownership, control and interdependence. Do the election, and your passive losses can offset non-passive income due to the grouping. If you miss it, then your deductions will be suspended and become unusable until you have passive income to offset or until you sell the property.
Reach out to a CPA or qualified professional if you would like to discuss what options exist for your business!
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