Real estate professional status: the 750-hour test and the aggregation election

Long-term rentals are passive by default, no matter how many hours you spend on them. Real estate professional status (REPS) under §469(c)(7) is the principal exception.

The two-part test

For the tax year, one spouse must individually meet both requirements:

1. More than 750 hours of services in real property trades or businesses in which they materially participate.
2. Real property trades or businesses account for more than half of all their personal services in all trades or businesses.

Real property trades include development, construction, acquisition, conversion, rental, operation, management, leasing, and brokerage. Hours as a W-2 employee only count if you own more than 5% of the employer.

The second test is the reason a full-time W-2 earner almost never qualifies. With 2,000 hours at a job, you would need more than 2,000 hours in real estate as well. Many households address this by having one spouse qualify.

Material participation is still required

REPS only removes the automatic passive label, and you must still materially participate in each rental. Unless you elect otherwise, every property is tested separately, which is difficult with five or ten properties.

The election to aggregate all rental real estate as a single activity addresses that problem. You make it with a statement attached to a timely filed return, and it is generally binding for future years. Because the election also affects how suspended losses are released on a sale, it deserves deliberate thought.

Key numbers: more than 750 hours · more than 50% of personal services · $25,000 special allowance phases out between $100,000 and $150,000 of MAGI.

The alternative: the $25,000 allowance

If you don't qualify, you may still deduct up to $25,000 of rental losses against other income if you actively participate, for example by approving tenants and setting rents, and your MAGI is under $100,000. The allowance is reduced by 50 cents per dollar above $100,000 and disappears at $150,000. You must own at least 10% of the property all year. Married couples filing separately get nothing unless they lived apart all year, in which case the allowance is $12,500 each, phasing out between $50,000 and $75,000.

A worked example

Maria is a licensed agent working 1,400 hours a year in brokerage as an independent contractor, not an employee. Her spouse earns $320,000 in W-2 wages. They own six rentals and make the aggregation election, and Maria logs 180 hours on the rentals, more than anyone else. With cost segregation on a new fourplex, the rental portfolio shows a $140,000 loss, which is now nonpassive and offsets the spouse's wages.

Common mistakes

1. Counting hours across both spouses for the 750-hour test. You can't combine them for that test, though you can for material participation.
2. Keeping no contemporaneous log. Calendars and other reasonable records can work, but courts routinely reject "ballpark" hour estimates made after the fact.
3. Forgetting the aggregation election and failing material participation property by property.
4. Using REPS losses without considering the excess business loss limit.

How Summer Associates helps

Summer Associates reviews your work history to see whether either spouse can realistically qualify, prepares the aggregation election, and builds a logging system designed to hold up in an exam.

This guide is general education based on federal and Connecticut law as of 2026-11-15. State rules differ and facts matter. Before acting, get advice for your situation from Summer Associates or another qualified advisor.