What Is Real Estate Professional Status?

Under U.S. federal tax law, rental real estate activities are generally treated as passive activities. What that means in practice is that losses from rental real estate are normally only deductible against other passive income (for example, income from another rental or business that’s passive). You can’t use real estate losses to offset active income like wages unless you qualify for a special exception.

That exception is Real Estate Professional Status (REPS) under § 469(c)(7) of the Internal Revenue Code. If you meet the criteria, then your rental real estate activities in which you materially participate are not automatically passive. In effect, you can treat losses and depreciation from your rental real estate as non-passive and use them to offset active income (subject to other tax rules).

In short: REPS can unlock powerful tax benefits for real estate investors who are actively managing their properties.

How To Qualify: The Two Key Tests and Material Participation

To qualify for REPS in a given tax year, you must satisfy both of the following, and also materially participate in the rental activities.

1. More Than 50% of Your Time (the “50% Test”)

You must spend more than half of all the personal service hours you perform in all your trades or businesses in real property trades or businesses in which you materially participate.

“Personal services” means work you do yourself, not passive investing. If you’re an employee in a real estate business, those hours don’t count unless you own at least 5% of your employer. If you file jointly, your spouse’s hours can count toward material participation tests, but cannot help satisfy your 50% or 750-hour tests.

2. At Least 750 Hours (the “750-Hour Test”)

You must perform more than 750 hours of service during the year in real property trades or businesses in which you materially participate.

You may combine time spent across multiple real estate activities (development, rentals, management, leasing, brokerage, etc.) as long as you materially participate in those. Only those hours where you materially participate in the underlying real property trade or business count for REPS.

3. Material Participation in the Rental Activities

Even after passing the two tests above, each rental property must satisfy a material participation test to treat it as non-passive. Otherwise, that property’s losses may still be considered passive and subject to the passive-loss rules.

The IRS provides several “safe harbor” tests to show material participation. These include:

• You work more than 500 hours in the activity.

• You do substantially all the work yourself (or your participation is the primary contribution).

• You work more than 100 hours and no one else works more than you.

• You materially participated in that activity for 5 of the last 10 years.

If you have multiple rental properties, you may elect (via IRS rules) to treat all rental interests as one aggregated activity for the purposes of material participation. That can simplify the test.

Why It Matters — The Tax Benefits and Risks

If you successfully qualify:

• Rental losses and depreciation from your properties (in which you materially participate) become non-passive. You can use them to offset your other active income (for example, self-employment, business income, W-2), greatly reducing your taxable income.

• You may avoid or reduce the 3.8% Net Investment Income Tax (NIIT) on rental income, because the income is no longer considered passive.

• Losses that were previously suspended because of passive rules may be freed up, depending on the year you first qualify.

However, some caveats and risks apply:

• IRS scrutiny is high. Because the benefit is significant, the IRS expects thorough documentation—daily time logs, calendars, detailed records.

• You must genuinely perform the work; you cannot outsource all property management and still meet the tests.

• This qualification can change annually. You may qualify one year and not the next.

• Some states may not align with the federal rules. For example, California doesn’t recognize the REPS status in its state income tax system.

Special Considerations and Nuances in Utah

When it comes to Utah specifically, there is no distinct state-level rule that mirrors or overrides the federal Real Estate Professional Status.

Utah observes federal taxable income as its starting point, and many of the same rules apply unless Utah has a specific disallowance or adjustment. Because Utah does not have a unique carve-out or disallowance relating to REPS, if you qualify federally, you generally benefit at the state level as well.

That said, in some states there may be conformity issues—states that do not conform to certain federal tax benefits—but there’s no strong evidence showing Utah rejects REPS benefits.

One practical Utah-related point: many real estate professionals in the Salt Lake City and mountain regions hold dual roles (broker, property manager, investor), so structuring your time to pass the 50% and 750-hour tests is feasible. Documentation remains critical, especially to defend your position if examined by the IRS or Utah State Tax Commission.

Strategy Tips and Best Practices

To improve your chances—and defend your position—of qualifying for REPS:

1. Track your time meticulously. Keep daily timesheets, calendar notes, logs of tasks, start and end times, property addresses, and other records.

2. Aggregate responsibilities. Repairs, selecting contractors, tenant screening, bookkeeping, showing units, and lease renewals all count.

3. Use the aggregation election (treat all properties as one activity) to simplify meeting material participation.

4. Set your priorities. If you have another business or job, make sure your real estate hours exceed half your working hours.

5. Reassess every year. Qualification can swing year-to-year, so conduct a midyear check.

6. Stay conservative in claims. Don’t inflate hours; if audited, you want to comfortably support your records.

7. Work with a tax professional experienced in real estate taxation in Utah. Local rental markets, state rules, and your property mix all affect the analysis.

Sample Scenario — How It Might Look in Practice

Jessica lives in Utah. She’s a licensed real estate broker who owns three rental properties. Over the year, she spends about 1,000 hours working in her real estate business (brokerage, property maintenance, tenant management, showing units, bookkeeping) and 800 hours running a small consulting business.

Her real estate work represents more than 50% of her total work (1,000 vs. 800). Of those 1,000 hours, she spends over 750 hours managing the rentals—handling repairs, screening tenants, managing finances, and overseeing contracts. For each rental, she materially participates.

Because she passes both tests and keeps records, she qualifies as a real estate professional. The depreciation and operating losses on her rental properties become non-passive, offsetting her consulting and brokerage income on her federal return. Utah taxes her based on federal taxable income, so she benefits at the state level as well.

Final Thoughts

Real Estate Professional Status is one of the most powerful tax strategies available to serious real estate investors and operators. But it requires real commitment: devoting significant hours, actively managing properties, and maintaining detailed documentation.

For Utah-based professionals and investors, there’s no state-level rule that eliminates the REPS benefit, so qualifying federally generally provides the same advantage in Utah. With proper planning and accurate records, REPS can be a cornerstone of an effective tax strategy for anyone building wealth through real estate.