What is REPS?
Real Estate Professional Status (REPS) is a tax-advantaged designation. It can provide you with important tax benefits if you rely on real estate income. For the most part, it’s a designation that is only available to those heavily invested in real estate.
If you’re a real estate professional, REPS can save you a lot of money. It can also offer you protection from factors such as depreciation. But before you apply, you should know what qualifies you as a “Real Estate Professional”.
What Are The REPS Qualifications?
If, over the course of the tax year, you or your spouse’s main activity was real estate, you likely qualify. There are two main marks you need to hit to be able to claim the designation:
- At least half of the professional services you provided during the tax year were real estate trades or related work.
- You’ve spent at least 750 hours conducting real estate trades or providing real estate services.
At this point, you can already accurately guess whether or not you qualify. All the same, you’ll need to properly determine whether you meet these requirements. Even if you’ve spent over half your work time for this tax year on real estate, you may not meet the hours worked requirements.
How To Calculate Your Hours
The third REPS requirement is effectively baked into the two requirements listed above. The 750-hour rule regarding time spent on real estate trades or other activities comes with a few limitations. The activities that count towards those 750 hours must involve your “material participation”.
Material participation implies your direct and active participation in all the tasks you’re tallying. So, if the time was spent renting out apartments and handling your tenants’ needs, they count towards the 750-hour requirement.
All the typical activities that come with managing a real estate investment will count. Talking with tenants in person about maintenance concerns will count. Being on-site during maintenance work will count.
The following activities can be counted towards your material participation tally:
- Brokerage trade or business
- Real property development
What Cannot Count Towards The 750 Hours
What doesn’t count towards the 750-hour requirement is any task that you outsource. That’s why the third requirement is labeled “material participation”.
The IRS regulations surrounding material participation aren’t the clearest part of the IRS Code. The precise list of activities (which we listed above) that constitute material participation is in Section 469(c)(7) of the IRS Code.
While it’s hard to ensure your activities certainly count in some cases, ask yourself:
- Was I present at the location maintenance was conducted?
- Was I there to renew the tenant’s lease?
- Did I make all the managerial decisions myself?
If your answer is yes, you can count that hour towards the 750-hour requirement.
If you’re unsure about a much more specific task, you should consult a tax accountant or advisor.
The purpose of getting your REPS designation is to lower your tax burden. You can save on taxes in several ways.
The REPS designation allows you to offset rental losses against your income. You can find the available deductions laid out in IRS Publication 925.
What this means is that several things that normally aren’t tax-deductible will become deductible with REPS. Wear and tear on your rental properties will be deductible. In some cases, you can even report a loss on your tax returns when you’re still generating positive cash flow.
In real estate, your taxes are based on your net income.
Your net income is just the result of subtracting your expenses from your income.
In real estate, you can claim several expenses that you don’t actually need to pay for. Those ‘expenses’ are known as ‘phantom expenses’. The main phantom expense recognized by the IRS is real estate depreciation.
REPS allows you to claim deductions for the depreciation of your real estate investments. In fact, these phantom expenses are the main reason why REPS exists.
The IRS claims that the value of land itself doesn’t depreciate. But when you own real estate, you can expense several items over time. Most building maintenance and improvement expenses qualify. Think expenses like roof repairs and plumbing.
There are two forms of depreciation you can claim.
Straight-Line Depreciation is a set expense that continues every year.
Accelerated Depreciation is when you take some or all of your expenses upfront.
You can deduct wear and tear even when they’re not immediate expenses. Personal expenses such as home phone bills can be deducted as well, as long as they’re used for work. Sometimes, these REPS deductions can even make your tax bill negative. But as a REP, these losses become non-passive for you. This allows you to use them to offset Form W-2 clinical income
A REPS designation is good for both you and your spouse. If one spouse has the REPS designation and the couple files jointly, both of you can claim REPS deductions.
REPS is a great designation for a single or married individual relying on real estate income. If your primary main activity is real estate, it’s worth it to gain your REPS.
The tax benefits you get, especially for long-term real estate investments, are considerable. If you think you or your spouse qualify for REPS, start tallying your working hours. After all, there’s no downside to some extra tax benefits.
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