Real Estate Professional Status (REPS) is Overhyped!
It’s not the golden tax loophole you think is.
There’s a lot of buzz about Real Estate Professional Status (REPS) among physician groups. It’s often glorified as a golden tax-saving strategy, but the truth is, it may not provide the benefits you think it will.
Let me break the bad news to you.
REPS can help only if your rental properties generate a net loss.
Let me repeat that - REPS can help only if your rental properties generate a net loss.
And even then, REPS alone is not enough to deduct those rental losses against your physician salary.
The key is to actually using those rental losses is passing the material participation test for your rental activities—and that’s the part I see physicians miss most often.
There are seven ways to pass the material participation test, but the most common and safest way is to spend more than 500 hours performing day-to-day activities (e.g., showing the property, arranging repairs, collecting rents).
I’ll cover material participation in more detail in another article.
How Do You Qualify for Real Estate Professional Status?
To qualify as a Real Estate Professional, you must meet two key tests:
750-Hour test – You must spend at least 750 hours per year in real estate activities, such as selling, managing, or developing real estate, for example.
50% test – More than 50% of your total working hours must be spent on real estate activities.
If you have a full-time W-2 job (like being a physician), this is nearly impossible to achieve. No matter how many rental properties you own, since the majority of your time would most likely be spent as a doctor, you will unlikely qualify for REPS.
Court Case Example: Vandergrift v. Commissioner, T.C. Memo. (2012-14)
Vandergrift owned nine rental properties and actively managed them. However, he also had a W-2 job earning $120K per year. The court disallowed his REPS status and denied his ability to use rental losses against his W-2 income.
This is just one of many court cases where the IRS scrutinized taxpayers with W-2 income and disallowed their REPS claims
When Does REPS Actually Work for Physicians?
While REPS is tough for full-time physicians, it can work when a spouse qualifies.
Here’s a winning scenario:
One spouse is a physician (high W-2 income).
The other spouse qualifies for REPS by spending 750+ hours on real estate activities, such as managing rental properties or working as a real estate agent.
Together, both spouses actively manage the rental properties and meet the material participation test (e.g., 500+ hours of direct involvement in property management)
Their rental property portfolio generates a large net loss.
This setup converts passive rental losses into non-passive losses, allowing them to offset the physician’s W-2 income, creating significant tax savings!
The Bottom Line
For full-time physicians, REPS is essentially unattainable—but for couples where the non-working spouse likes to actively manage the rental portfolio and the properties generate significant losses, REPS can be a powerful tax-saving strategy.
Otherwise, don’t waste your time chasing REPS - it’s not the golden tax loophole that some make it out to be!