Your Complete Guide to the Real Estate Professional Tax Loophole

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If you are an investor (which of course you are; otherwise, you would probably not be here on BiggerPockets), you may have already heard of the wonderful tax benefits of being a real estate professional.

If you haven’t heard, here is a quick snapshot.

Tax Perks for Real Estate Professionals

For taxpayers who invest in rental real estate, we can always use our expenses and depreciation to reduce our rental income. However, if we have more expenses than we do rental income, there are a set of rules which determine whether or not we can use those excess losses to offset income from other sources such as our W-2.

In general, if you make $100k or less each year, you can have up to $25k of excess rental losses to offset your other income. If your total income is between $100k and $150k, then you can only use part of your excess losses to offset your other income.

If you make over $150k, then you generally cannot use any of the excess real estate losses to offset your other income. These excess losses are called “passive losses” and are carried forward for you to use to offset rental income or capital gains on the rental property in future years.


It is important to note that in all three of these scenarios, we are talking about “excess” losses. We can always use our expenses and depreciation to reduce our rental income down to zero, but the limitations only come up in situations where you have more losses than income for any given year.

Now, if you happen to be someone who makes $150k or more and also had a bad year in real estate where you had some large losses, there is a potential way to still use the excess rental losses to offset your other income. The way to do that is using the real estate professional tax loophole.

Related: 3 Reasons You Should LOVE the Home Office Tax Deduction

For someone who is a real estate professional if they have a total income of $200k and net rental losses of $50k, this means that they can use $50k of losses to bring down their total taxable income to $150k. On the other hand, if this taxpayer was not a real estate professional, then their taxable income would remain at $200k for the year.

So now that you know the benefit of being a real estate professional, what exactly is this real estate professional loophole, and how can you take advantage of it?

The Ins & Outs of the Real Estate Professional Tax Loophole

Contrary to popular belief, you do not need to be licensed as a real estate agent in order to be considered a real estate professional. It has nothing to do with your education, professional licenses that you hold or what type of business you are in. Rather, the IRS determines real estate professional status based on a different set of criteria.

It involves the type of activity that the taxpayer is conducting in that year for the properties, as well as the amount of time spent on such activities. Simply put, the taxpayer (or spouse) needs to meet two requirements in order to qualify for the tax benefits of being a real estate professional.

The Requirements

  1. Spend more time in real estate activities than other “non-real estate” business activities combined.
  2. Spend at least 750 hours per year in real estate activities.

Please note that both requirements must be met in order to be designated as a real estate professional in the eyes of the IRS.

Related: 4 Depreciation Tax Mistakes Investors Need to Avoid

Another key item to note is that only the taxpayer or spouse needs to meet the qualifications, and they both get to use the losses to offset income.

Let’s go over some examples of how this works.

Example 1:

Let’s say that we have Jim, a single person who works a full time job of 40 hours a week and earns $200k for the year.

For Jim to qualify as a real estate professional, he would need to spend more than 2,000 hours per year in real estate in order to meet both rules.

Example 2:

Tom and Ann are married and own 5 rentals. Tom works full time at his job making $200k per year, and Ann is a stay at home mom. As long as Ann spends more than 750 hours actively involved in their rentals, they can use the excess losses on the rentals to offset Tom’s W-2 income without limitations.


The reason is that since Ann does not have a job or work activities that earn income, she only needs to meet the 750 hours of active participation in order to be a real estate professional.

If we changed this up a bit and the only difference was that Tom spent 300 in real estate activities and Ann spent 600 hours in real estate activities, do they meet the real estate professional rules?

Unfortunately, the answer is no. The reason is that a couple cannot combine their hours in order to meet the requirements. The hours requirement must be incurred by one person in order for that person to qualify as a real estate professional.

So if you are someone whose rental losses have been limited and feel that you or your spouse could potentially meet the requirements of being a real estate professional, be sure to speak with your tax advisor on this great loophole!

[Editor’s Note: We are republishing this article to help out our newer readers.]

Have you ever used the real estate professional tax loophole? Do you meet its requirements?

Let’s talk in the comments section below!

About Author

Amanda Han

Amanda is a CPA specializing in tax strategies for real estate, self-directed investing, and individual tax planning with over 18 years’ experience. She is also a real estate investor of over 10 years with a focus on long-term hold residential and multi-family assets across multiple states. Formerly a tax advisor at the prestigious accounting firm Deloitte in the Lead Tax Group, focusing on tax strategies for the real estate industry and high net worth individuals, and at an international Fortune 500 Company in the high-tech industry in the Corporate Tax department, Amanda’s goal is to help investors with strategies designed to supercharge their wealth building. Amanda’s highly rated book Tax Strategies for the Savvy Real Estate Investor is amongst Amazon’s best seller list. A frequent contributor, speaker, and educator to some of the nation’s top investment and self-directed IRA companies, Amanda has been featured in prominent publications including Money Magazine,, and Amanda was a speaker at Talks at Google and is a 40 under 40 honoree by CPA Practice Advisor, showcased amongst the best and brightest talent in the accounting profession. Her firm Keystone CPA, Inc. was awarded a two-time winner of the Top CPA of Orange County Award by OC Metro Magazine. She is certified by the CA State Board of Accountancy and is a member of the prestigious American Institute of Certified Public Accountants (AICPA) with clients across the nation.


  1. Edward J Synicky on

    This is a great way to save in Federal Tax. But at least in California the real estate professional is not recognized by the state so any losses not claimed become Passive carry over. In this high tax state this is a huge impact, obviouly still worth doing from the federal tax perspective. And if you work full time (not in real estate, speceial rules apply) do not even think of using the designation, you will eventuallly be audited and in all probablility you will loose. Perfect for the couple that has one non working spouse and significant amount of real estate to manage. Nothing in the IRS rules say how many properties you need to own to qualify, most professionals think 5 is a minimum. Always check with your tax expert before using the real etate professsional designation!

    • Agreed Edward….CA is not as investor friendly as the IRS so this is a common issue we see. On the bright side, generally when a rental is sold for a gain the CA is a lot less for those who have more passive losses to offset those gains in CA.

  2. Edward J Synicky on

    Eric, it will not help you, but you are in an enviable position. My advise to you is buy more real estate and create more tax deductions using depreciation. I would not buy negative cash flowing properties but you will still have a “loss” in all probability. By the way, congratulations, if you do nothing you are still a winner. I hope you someday have to pay a million dollars in taxes, can you imagine your income to qualify for that elite club.

    • Thanks for the compliments. I looked a couple of properties this year, but paid off a mortgage with my excess cash. $188K. So, now I am thinking about retiring and leaving my real job, then explore a bit.

      When you have enough, that’s all you need.

  3. Thanks for the article Amanda.
    If in buy n hold landlording business,approximately how many rentals/units does one need to average 750 hours per year?
    Is there any IRS article regarding what activities count/dont count when calculating the hours?Seem to have read somewhere things like looking up properties to see if they make sense in ones portfolio, is not a qualified activity anymore per one of the tax courts ruling.

    • Hi Brandy: There is not safe harbor or bright line test for really comes down to the property itself. (ie: owning an out of state property with management on site you may be expected to reasonably spend less time on it than a self managed rental close to where you live. OR self-managing an apartment should take more time than self managing a SFR., etc.). On the property search it also depends. I would make the arguement that if you were searching for properties to do or potentially do a 1031X on an existing rental that the time would count as qualified activity. On the other hand if you are just looking online and never actually buy anything then that will likely not pass the reasonable person test. Thanks for your comments!

    • Dennis: Its great that you have been doing it for years….this means you are working with a great CPA! Unfortunately as a CPA myself I have to admit that on tax returns we review a decent percentage of eligible people do not claim to be real estate professional or dont claim it correctly due to wrong or lack of advice. Thanks for your comment! =)

  4. “If your total income is between $100k and $150k, then you can only use part of your excess losses to offset your other income.”

    Do these numbers change at all if you are Single or Married?

  5. A very valuable post! This is a great loophole and an important point for those wanting to stay out of trouble with the IRS. A lot of people think that just by owning real estate you are entitled to take the losses, but that’s not true in all cases. My wife is a hard nosed CPA and we have debated this a lot, but truth is it is pretty straight forward. In her words,

    “Real estate is passive by nature. Passive losses are only deductible against passive income (not wages, interest, capital gains, etc.). If there is no passive income, then it is suspended and carried over indefinitely until you sell the activity that is generating the losses. There is an exception for taxpayers with AGI below $150K that are allowed to deduct up to $25K in rental real estate losses against other income. That’s it in a nutshell.”

    Unfortunately, CPAs often give bad advice and take deductions they should not. But few real estate investors will be able to prove that they’re a real estate professional if it is something they only do on the side.

    Here are some specific references on the topics:

  6. What’s the benefit of REP status over just regular depreciating? Is it only beneficial for those with high losses (over 25K) and high income – 100K to 150K or more? There are times when we have a lot of expenses upgrading a rental to get it in shape for hopefully years to come. Would REP status be of benefit in those cases? Would you have to have a work log of time spent doing real estate related things – marketing for new tenants, showing the home, time spent on screening, cleaning/painting, installing new fixtures, etc? All of those types of activities?

    • Hi Gerald: No difference in depreciation and yes it only effects people with both profiles you listed. Lastly…yes it is necessary to keep a time log of your time in real estate especially if you have other non real estate activities that you are involved with. Thanks for your comment!

  7. Thanks for the good aricle Amanda. Wondering if there a benefit for regular people w/o high incomes? The need to pay straight income tax instead of capital gains on sales is enough for me to not work toward it.

    Is there a choice? If you are retired and just do RE it might be hard to not qualify. If I add up all the hours I spend on BP I am in for sure.

    • Hi Jeff: Whether REP is beneficial to you if you dont have high W-2 income will depend on whether you have a tax loss on your rentals and if so how much. If the net loss each year is under $25k then dont worry about REP…if it exceeds $25k then you may want to work with your CPA to do some planning. Also…if you are working with rental real estate…I dont see any reason why you would not get capital gains treatment when you sell your rental property.

      • Ayaz Usman

        Amanda great article, as a follow up, if your gross income is over $150k, and you can make your rentals get down to $0 cashflow on paper ( depreciation, maintenance, taxes, hoa dues, etc…), how else could you offset your w-2 income?

        Would home office deduction for your w-2 job or your real estate office be allowed?(mortgage, taxes, maintenance, cleaning, gardening, painting, repair, hoa, storage, etc) or at least the portion of the home you use for this activity ?

  8. Thanks Amanda for the article!

    1.) You answered above that the 100k and 150K limits dont change if your filling jointly? Is that for real, because almost everything seems to double when you file jointly.

    2.) Lets say household income is 149K, and I have full time job, but also work 750 hours in RE. Can I apply as and RE professional? (I do have RE license)

    3.) If you start taking depreciation on a house, are you forced to be consistant or can you skip years if the depreciation is not needed?

  9. Great article, I was going to look more into this very topic as you mentioned it in your BP podcast- which was very helpful by the way. This article clarified exactly the information I was looking for!

  10. Thank you Amanda.
    My wife is a real estate agent. We don’t own properties yet but are looking. Would my wife’s status as an agent qualify her as a Real Estate Professional even if most of her time is spent on the agent rather than the rental property side of this business?

    • Amanda Han

      Hi Anthony: if you dont currently own rentals then it doesnt matter whether you are real estate professional or not since wife’s income/losses from realtor type activities are never limited as rentals are sometimes. Whether her time in the realtor activities count as real estate professional time….the answer is it depends. If she manages her own rentals and gets paid as 1099 then the answer is probably yes. If she gets paid a W-2 and does not have any ownership in the brokerage business then the answer is probably no. Thanks for reading!

  11. Stephen M.

    Great article and so informative. This is a old blogpost so not sure if it’ll get any reads but I’ll try anyway. How does a LLC impact the ability to offset personal tax losses? As a an illustration, using your example 2 ( Tom makes >200k per year and ann is stay at home real estate professional) and they have their properties in a LLC and they have losses. Can they still offset the losses with toms income? Thanks

    • Nate T.

      Yes, but it would be tough. If working 40 hours on non-RE activities, then you would have to be working more than 40 hours on your RE activities. So a total of 80+ hour weeks. And you would have to document it carefully because the IRS might not believe you were a RE professional if you had another full time job.

  12. Last year I bought 3 Foreclosures and I\’m retired and spent the about 9 months of the year In Re-develop, construction, convertions, and did all work for HVAC to bring them to a rental state by September of 2016. I was actively involved in all matters of the real estate process, contracts, brokers, rentals, etc..
    Married and our total income this year was about $210K. I also have two other rentals from previous years actively rented.
    My CPA is telling me that I cannot write off the expenses and losses in the 3 houses houses since I only had about 3 months in only one of the house that was rented and others(2) were rented in 2017.He said that i\’m only able to take off the depreciation from the basis.
    My question is can i write off(-losses) for the taxes, construction repairs for these homes which can be close to $50K and can bring down my taxable income? What losses can I take for these 3 houses that I did a lot of work for close to $60K in taxes and repairs and Modifications?
    Your guidance is appreciated. Thanking you in advance.

  13. Sean Carroll

    In prior years I was not a REP and our income was over 150k so I carried forward the losses. In 2017, I anticipate to be able to meet the guidelines for REP. When and how can I claim those losses? Do I still need to sell the property in order to claim the carried forward losses? Thanks!

  14. ed taylor

    I’ll echo the comments others have offered – good article. Please expand on the status and role of the investor (I’m a long term hold landlord) but a flipper – rehab/short term hold/sell – investor, despite meeting the 750hr threshold would not quality or would he?. If one did both, then it would be time invested on the long-term investment “hold” properties that would be used in the calculation. correct, or am I off base?

  15. Jim Madden

    I am retired, on Social Security, and my wife works a W-2 job. We own nine single family rentals. If I am a Real Estate Professional, can my losses and depreciation be used to shelter IRA withdrawals, as well as passive income? Even if our Adjusted Gross Income is over $150,000?

  16. Mark Davis

    I’m very new to investment property.
    I spoke to an owner of a rental home today I was attempting to get under contract to wholesale. During our conversation the topic of depreciation came up. He said that when he sells the property he would have to pay back in taxes the amount of depreciation he has claimed while he owned the home. Is this true and if so is there a way around this?

    • Dean I.

      Looking for the same answer. In the mean time, I am keeping a log in a planner of what I am doing throughout the day. I own multiple businesses, but currently I spend more time on house flipping and I plan on picking up a few rentals to offset my other income, which I can only do if I qualify as a REP, since my income will be more than 150k this year.

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