Hi,
Most real estate investors have 6-figure tax deductions they do not actually use. This happens because their losses are classified as “passive.” Unless you qualify as a full-time real estate professional under IRS rules, you normally cannot apply real estate losses to W-2 or other active income.
Rental real estate is passive by default, so those losses can only offset other passive income. Real Estate Professional Status (REPS) is what switches that off & gets you the deduction.
Example of how the savings work:
Married couple, $400,000 of W-2 income, portfolio shows a $150,000 loss:
- Without REPS: All real estate losses are suspended and carried forward. The couple pays tax on the full $400,000.
- With REPS: The couple takes the full $150,000 deduction. That’s $36,000 in federal tax savings alone, and closer to $50,000 if state tax is in the picture.
Same properties, same depreciation, same return. The only difference is qualification as a real estate professional. There are two tests, both required:
- More than half your working hours during the year are in real estate trades or businesses
- More than 750 hours in those activities during the year
“Real property trades or businesses” is broader than people assume – development, construction, acquisition, conversion, rental, sales, operation, management, leasing, and brokerage all count. Then you need to materially participate in the rentals themselves.
Two common questions:
Question: I have a full-time job, but my spouse does not. Can we use my spouse for the real estate status?
Answer: Yes! On a joint return, only one spouse needs to qualify for the real estate tax benefits. Your household doesn’t need both spouses to meet the rules. 😀
Question: I work full time in a demanding W2 profession – no way will I qualify for this based on time alone. Can this still work for me?
Answer: Yes! There is a workaround: short-term rentals! If your guests typically stay a week or less and you are the one actively running the property, those losses can often be used against your regular income without meeting the 750‑hour real estate professional test.
Two things that stack on top of REPS:
- If you want to accelerate the loss, a cost segregation study plus 100% bonus depreciation can pull several years of depreciation into year one. With REPS, you can take the full deduction this year.
- Clearing 500 hours also gets you a safe harbor from the 3.8% net investment income tax on the rental income.
The catch is documentation. The IRS challenges these cases constantly and it usually wins on records. Reconstructing a log in April from memory and calendar guesses does not survive an exam. The log has to be built as you go, tied to specific properties and specific tasks.
The other catch is timing. Hours are counted year by year, and there are five months left in 2026. You cannot go back and create hours you didn’t log.
That’s why we put everything under one roof:
- Bookkeeping by property and by entity, with a dedicated bookkeeper
- Cost segregation studies coordinated with the return, not done separately and left to you to figure out
- Time tracking and audit-ready documentation built during the year
- Grouping elections, entity structuring, and multi-state filings
- 1031 exchange planning
- Partnership and S-corp returns with K-1s issued on time
- Quarterly tax estimates so you know what you owe before April
- A full one hour review of every credit and deduction you qualify for by the same team that files your return
- Personal and business tax returns handled by the same team
Reply to this email by Friday, and we’ll schedule a complimentary 15 minute call with our senior tax advisor to go over your situation. Bring your last invoice from your tax advisor/strategist, tax preparer, bookkeeper and payroll provider – so we can discuss how you can have everything under one roof.
Sincerely,
—
George Dimov, CPA
Licensed and Insured
(833) 829-1120 toll free
(212) 994-8081 Fax
www.dimovtax.com