DEBUNKED: "Managing your property manager" does NOT count towards REPS hours

Tax, SDIRAs & Cost Segregation
2yFollow

DEBUNKED: "Managing your property manager" does NOT count towards REPS hours

Account Closed
Accountant · San Diego, CA · Member since 2019 · 1k+ posts · 552 votes

Hey gang, 

One thing ive heard alot from folks lately about is how they are having their spouse qualify as real estate professional status, and getting the hours for it via having them "manage the property manager" and review financial statements (known as investor hours). 

Im sadly here to tell you that under audit, and we have 100s of court cases to back this up, that this WILL NOT FLY. You need to be materially participating in those hours for them to count. 

But lets back up a minute, let me cover some basics for folks who don't do this all day like me. 

REPS = real estate professional status. This is an important status for people to go for since it allows you to write off losses from rental activities on your other active income. 

Funny enough, prior to 1986 this rule didn't exist, and you could write off losses from rentals on w2 income. Must have been nice :P 

To qualify for the status there are two tests: 

1. spend 750 hours in a real property trade or business, AND spend more then half your working time in it. Sorry w2'ers, there is only one successful court case I have found where the guy sued and won. 

2. pass 1 on 7 material participation tests. There are only really 3 relevant ones: 

1. do more work in the property then anyone. (including contractors, cleaners, etc)

2. do 100 hours of material participation and that time is more then anyone else. (including contractors, cleaners, etc)

3. 500 hours of material participation 

What is material participation? 

These are activities where if they are not done, the negatively effect the p&l. Said differently, these activities are integral to the operation of your business. 

So next time your CPA saids you can use education hours, looking at financial statements(investor hours), or my favorite "managing the property manager" run for the hills. This will get you audited and you will lose. 

There are ways around it though like everything else, just need to get creative ;) 

3Reply
153 views

Most Popular Reply

Becca F.
Rental Property Investor · San Francisco Bay Area · Member since 2022 · 1k+ posts · 1k+ votes
2y

Great points! I was talking to some investor friends and they're counting Zoom office hours with other investors to brainstorm ideas in their REPS hours. I said I don't think that counts. 

Do the hours spent talking to an agent, contractor, lender to acquire the property count? For example the contractor had to replace roof or do other repairs to make the property rentable and I spent 2 hours talking to the roofing company and plumber? 

What about if I self manage and drive over to the property and spend 4 hours a week cleaning it out for 3 months prior to the renovation and it being rented out? And the time I spent writing the lease, screening the tenants myself, go over to the property if the kitchen sink is leaking?

3Reply
See this reply in the discussion

12 Replies

Jump to latestLatest
  • Becca F.
    Rental Property Investor · San Francisco Bay Area · Member since 2022 · 1k+ posts · 1k+ votes
    2y

    Great points! I was talking to some investor friends and they're counting Zoom office hours with other investors to brainstorm ideas in their REPS hours. I said I don't think that counts. 

    Do the hours spent talking to an agent, contractor, lender to acquire the property count? For example the contractor had to replace roof or do other repairs to make the property rentable and I spent 2 hours talking to the roofing company and plumber? 

    What about if I self manage and drive over to the property and spend 4 hours a week cleaning it out for 3 months prior to the renovation and it being rented out? And the time I spent writing the lease, screening the tenants myself, go over to the property if the kitchen sink is leaking?

    3Reply
  • Account Closed
    OP
    Accountant · San Diego, CA · Member since 2019 · 1k+ posts · 552 votes
    2y
    Quote from @Becca F.:

    Great points! I was talking to some investor friends and they're counting Zoom office hours with other investors to brainstorm ideas in their REPS hours. I said I don't think that counts. 

    Do the hours spent talking to an agent, contractor, lender to acquire the property count? For example the contractor had to replace roof or do other repairs to make the property rentable and I spent 2 hours talking to the roofing company and plumber? 

    What about if I self manage and drive over to the property and spend 4 hours a week cleaning it out for 3 months prior to the renovation and it being rented out? And the time I spent writing the lease, screening the tenants myself, go over to the property if the kitchen sink is leaking?


     Great questions Becca! 

    Please let your investor friends know those hours don't count and it will not count if they are audited. 

    Since these hours you mentioned are integral to the operation of your property, you are allowed to count these. You are acting as a property manager, and as long as you spend more then 500 hours at this per year or spent at least 100 hours per year and more time then anyone else, you are materially participating. Please note, you still need to meet the first test to fully qualify as a real estate professional. 

    2Reply
  • Becca F.
    Rental Property Investor · San Francisco Bay Area · Member since 2022 · 1k+ posts · 1k+ votes
    2y
    Quote from @Account Closed:
    Quote from @Becca F.:

    Great points! I was talking to some investor friends and they're counting Zoom office hours with other investors to brainstorm ideas in their REPS hours. I said I don't think that counts. 

    Do the hours spent talking to an agent, contractor, lender to acquire the property count? For example the contractor had to replace roof or do other repairs to make the property rentable and I spent 2 hours talking to the roofing company and plumber? 

    What about if I self manage and drive over to the property and spend 4 hours a week cleaning it out for 3 months prior to the renovation and it being rented out? And the time I spent writing the lease, screening the tenants myself, go over to the property if the kitchen sink is leaking?


     Great questions Becca! 

    Please let your investor friends know those hours don't count and it will not count if they are audited. 

    Since these hours you mentioned are integral to the operation of your property, you are allowed to count these. You are acting as a property manager, and as long as you spend more then 500 hours at this per year or spent at least 100 hours per year and more time then anyone else, you are materially participating. Please note, you still need to meet the first test to fully qualify as a real estate professional. 

    Thanks! I did let them know and if they could find a citation to justify their Zoom office hours, which I doubt there is. My understanding is that you have to spend at least 50% of your working time on RE to qualify for REPS. For example a W2 worker who works 40 hours a week for 50 weeks out of the year, assuming 2 week vacation, works 2080 hours. So the W2 worker would need to spend 2081 or more hours in RE with material participation to qualify for REPS? What I've seen from watching videos is that the tax court will not believe someone is working 4160 hours. 

    There are people who have more downtime at their jobs, say they work 1600 hours so that's 1601+ hours they need to spend in RE for qualify for REPS. I have downtime during my W2 job and someone said that I could qualify for REPS - I spent a lot of hours cleaning out a house to prep for renovation, met the contractor and did walk throughs, went to Home Depot to buy materials, self manage, went out there when the sink was leaking, etc. I think it's still cutting it close and now I have to back track and add up all that time, so re-creating a time log. I don't know if it's worth it to add up all these minutes.

    Do people claiming REPS have to pay penalties if they don't pass an audit along with the back tax they owe to the IRS? 

    1Reply
  • Account Closed
    OP
    Accountant · San Diego, CA · Member since 2019 · 1k+ posts · 552 votes
    2y
    Quote from @Becca F.:
    Quote from @Account Closed:
    Quote from @Becca F.:

    Great points! I was talking to some investor friends and they're counting Zoom office hours with other investors to brainstorm ideas in their REPS hours. I said I don't think that counts. 

    Do the hours spent talking to an agent, contractor, lender to acquire the property count? For example the contractor had to replace roof or do other repairs to make the property rentable and I spent 2 hours talking to the roofing company and plumber? 

    What about if I self manage and drive over to the property and spend 4 hours a week cleaning it out for 3 months prior to the renovation and it being rented out? And the time I spent writing the lease, screening the tenants myself, go over to the property if the kitchen sink is leaking?


     Great questions Becca! 

    Please let your investor friends know those hours don't count and it will not count if they are audited. 

    Since these hours you mentioned are integral to the operation of your property, you are allowed to count these. You are acting as a property manager, and as long as you spend more then 500 hours at this per year or spent at least 100 hours per year and more time then anyone else, you are materially participating. Please note, you still need to meet the first test to fully qualify as a real estate professional. 

    Thanks! I did let them know and if they could find a citation to justify their Zoom office hours, which I doubt there is. My understanding is that you have to spend at least 50% of your working time on RE to qualify for REPS. For example a W2 worker who works 40 hours a week for 50 weeks out of the year, assuming 2 week vacation, works 2080 hours. So the W2 worker would need to spend 2081 or more hours in RE with material participation to qualify for REPS? What I've seen from watching videos is that the tax court will not believe someone is working 4160 hours. 

    There are people who have more downtime at their jobs, say they work 1600 hours so that's 1601+ hours they need to spend in RE for qualify for REPS. I have downtime during my W2 job and someone said that I could qualify for REPS - I spent a lot of hours cleaning out a house to prep for renovation, met the contractor and did walk throughs, went to Home Depot to buy materials, self manage, went out there when the sink was leaking, etc. I think it's still cutting it close and now I have to back track and add up all that time, so re-creating a time log. I don't know if it's worth it to add up all these minutes.

    Do people claiming REPS have to pay penalties if they don't pass an audit along with the back tax they owe to the IRS? 


    So the W2 worker would need to spend 2081 or more hours in RE with material participation to qualify for REPS? - Yes but as you mentioned this is never accepted in court. Part-time folks can indeed try to go for it, given their situation.

    If you cannot qualify as REPS and have been claiming it, then yes you will pay penalties and back taxes. I suggest updating your time log accurately and ensuring compliance as best as possible!
    1Reply
  • Daniel DietzPro Member
    Rental Property Investor · Reedsburg, WI · Member since 2011 · 1k+ posts · 857 votes
    2y
    Quote from @Account Closed:

    Hey gang, 

    One thing ive heard alot from folks lately about is how they are having their spouse qualify as real estate professional status, and getting the hours for it via having them "manage the property manager" and review financial statements (known as investor


    Account Closed I would be interested to hear your take on what other things can make a person a 'real estate professional'?

    It seems like everyone agrees that being an active Realtor does. What about other 'property trades' people? Builders, Trades (plumbing, electrical, etc.... )?

    Personally I do house remodeling full time. I also flip houses, but that is more on an occasional basis.

    Do 'Trades' who actively work on houses qualify? '

    Thanks, Dan Dietz

    [email protected]608-524-4899
    1Reply
  • Account Closed
    OP
    Accountant · San Diego, CA · Member since 2019 · 1k+ posts · 552 votes
    2y
    Quote from @Daniel Dietz:
    Quote from @Account Closed:

    Hey gang, 

    One thing ive heard alot from folks lately about is how they are having their spouse qualify as real estate professional status, and getting the hours for it via having them "manage the property manager" and review financial statements (known as investor


    @Zachary Jensen I would be interested to hear your take on what other things can make a person a 'real estate professional'?

    It seems like everyone agrees that being an active Realtor does. What about other 'property trades' people? Builders, Trades (plumbing, electrical, etc.... )?

    Personally I do house remodeling full time. I also flip houses, but that is more on an occasional basis.

    Do 'Trades' who actively work on houses qualify? '

    Thanks, Dan Dietz

    Hey Daniel, The IRS has a list of 11 real property trades or businesses that qualify: 
    real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage. If you fall under one of these it will count toward test 1. Trades who actively work on houses indeed qualify. I hope that helps! 

    4Reply
  • Nate MeekerBusiness Member
    Real Estate CPA | California · Member since 2020 · 543 posts · 251 votes
    2y

    @Becca F. - us accountants love hearing what everyone's else's friends are doing for tax strategies haha zoom hours with other investors definitely does not count. Investor type level hours don't really count but are still good to keep track of to further prove your case under audit.

    Great post @Account Closed. 

    The CPA Realtor 569 Reviews
    WebsiteView Page
    2Reply
  • Becca F.
    Rental Property Investor · San Francisco Bay Area · Member since 2022 · 1k+ posts · 1k+ votes
    2y
    Quote from @Account Closed:
    Quote from @Becca F.:
    Quote from @Account Closed:
    Quote from @Becca F.:

    Great points! I was talking to some investor friends and they're counting Zoom office hours with other investors to brainstorm ideas in their REPS hours. I said I don't think that counts. 

    Do the hours spent talking to an agent, contractor, lender to acquire the property count? For example the contractor had to replace roof or do other repairs to make the property rentable and I spent 2 hours talking to the roofing company and plumber? 

    What about if I self manage and drive over to the property and spend 4 hours a week cleaning it out for 3 months prior to the renovation and it being rented out? And the time I spent writing the lease, screening the tenants myself, go over to the property if the kitchen sink is leaking?


     Great questions Becca! 

    Please let your investor friends know those hours don't count and it will not count if they are audited. 

    Since these hours you mentioned are integral to the operation of your property, you are allowed to count these. You are acting as a property manager, and as long as you spend more then 500 hours at this per year or spent at least 100 hours per year and more time then anyone else, you are materially participating. Please note, you still need to meet the first test to fully qualify as a real estate professional. 

    Thanks! I did let them know and if they could find a citation to justify their Zoom office hours, which I doubt there is. My understanding is that you have to spend at least 50% of your working time on RE to qualify for REPS. For example a W2 worker who works 40 hours a week for 50 weeks out of the year, assuming 2 week vacation, works 2080 hours. So the W2 worker would need to spend 2081 or more hours in RE with material participation to qualify for REPS? What I've seen from watching videos is that the tax court will not believe someone is working 4160 hours. 

    There are people who have more downtime at their jobs, say they work 1600 hours so that's 1601+ hours they need to spend in RE for qualify for REPS. I have downtime during my W2 job and someone said that I could qualify for REPS - I spent a lot of hours cleaning out a house to prep for renovation, met the contractor and did walk throughs, went to Home Depot to buy materials, self manage, went out there when the sink was leaking, etc. I think it's still cutting it close and now I have to back track and add up all that time, so re-creating a time log. I don't know if it's worth it to add up all these minutes.

    Do people claiming REPS have to pay penalties if they don't pass an audit along with the back tax they owe to the IRS? 


    So the W2 worker would need to spend 2081 or more hours in RE with material participation to qualify for REPS? - Yes but as you mentioned this is never accepted in court. Part-time folks can indeed try to go for it, given their situation.

    If you cannot qualify as REPS and have been claiming it, then yes you will pay penalties and back taxes. I suggest updating your time log accurately and ensuring compliance as best as possible!

     I have not been claiming REPS. A couple of investors said I could try to claim REPS since I did spend a lot of time on that 2022 renovation. If I count the number of times a week I was over at that property and the hours (or hours at Home Depot buying supplies for rental), it will be a stretch to say I spent the same amount of hours +1 hour as my W2 job.

    There's a CPA firm that has a few good videos on REPS and they go into detail about tax court cases. People were retroactively coming up with time logs under audit, using a 2021 calendar for 2020 RE activities, counting investor hours (reviewing financial statements), managing the PM or claiming they don't work as many W2 hours as they really did. They said it was very difficult to convince the tax court you're working 12 hours a day for 50 weeks a year to add up to 4160+ total hours (W2 and real estate). They said once a taxpayer lies to the IRS, they lose credibility. Once that happens the IRS starts asking more questions and their credibility is completely shot and they have to pay the penalty and back taxes. 

    After hearing about those tax court cases and that REPS is highly litigated, I hope my friends re-examine their time logs and delete those webinar and Zoom office hours. "I spent 200 hours researching properties on Zillow and the MLS" LOL

    1Reply
  • Account Closed
    OP
    Accountant · San Diego, CA · Member since 2019 · 1k+ posts · 552 votes
    2y
    Quote from @Nate Meeker:

    @Becca F. - us accountants love hearing what everyone's else's friends are doing for tax strategies haha zoom hours with other investors definitely does not count. Investor type level hours don't really count but are still good to keep track of to further prove your case under audit.

    Great post @Account Closed. 


     Thank you sir! Yes way to many people think this is the magic pill that will make taxes go away. Sad to say there is no magic to it! 

    0Reply
  • Christopher StevensPro Member
    Rental Property Investor · Redondo Beach · Member since 2023 · 36 posts · 44 votes
    2y

    So, what do the hours count for when you're managing the property management company? My understanding is there are "Material" and "General" hours. When acquiring a property through a turnkey company, I count those as Material hours since I'm spending dozens of hours acquiring a property that will be rented. Also, if I'm on the board of an HOA, shouldn't ALL the hours spent in meetings and helping to maintain all 34 properties in the complex be considered "Material" hours?

    This stuff is SO confusing and seemingly arbitrary, but it's probably clear-cut. It seems (me included) that we want to count hours that shouldn't be counted toward REP hours. I just wish there was a better/easier way to know for sure what counts toward what for REP hours. I've been using REP Tracker, thinking that managing the property management company counts towards Material hours, but that's clearly not the case.

    We need an app where one can enter the activity, and the app would show if those hours counted or not. If I had a clear idea of what counted, I'd spend my time creating that app, but I don't even know what qualifies. It's time-consuming enough to track hours, let alone check to see if the tracked hours count or don't count.


    Thank you ALL who posted and have continued to discuss this cryptic designation. 
      

    1Reply
  • Account Closed
    OP
    Accountant · San Diego, CA · Member since 2019 · 1k+ posts · 552 votes
    2y
    Quote from @Christopher Stevens:

    So, what do the hours count for when you're managing the property management company? My understanding is there are "Material" and "General" hours. When acquiring a property through a turnkey company, I count those as Material hours since I'm spending dozens of hours acquiring a property that will be rented. Also, if I'm on the board of an HOA, shouldn't ALL the hours spent in meetings and helping to maintain all 34 properties in the complex be considered "Material" hours?

    This stuff is SO confusing and seemingly arbitrary, but it's probably clear-cut. It seems (me included) that we want to count hours that shouldn't be counted toward REP hours. I just wish there was a better/easier way to know for sure what counts toward what for REP hours. I've been using REP Tracker, thinking that managing the property management company counts towards Material hours, but that's clearly not the case.

    We need an app where one can enter the activity, and the app would show if those hours counted or not. If I had a clear idea of what counted, I'd spend my time creating that app, but I don't even know what qualifies. It's time-consuming enough to track hours, let alone check to see if the tracked hours count or don't count.


    Thank you ALL who posted and have continued to discuss this cryptic designation. 
      


    So you are correct, it is confusing but it really comes down to "is this person clearly a passive participant in the rental real estate". If you are working in the HOA and spending time that is integral to the earning of monies for the rental properties, these extra hours managing managers, educational hours, reviewing financials etc should count. The issue arises when you are only logging time for managing the manager / education and research hours only.

    1Reply
  • Mark Davis
    Member since 2024 · 1 post · 0 votes
    2y

    Thank you for all the helpful information.  Newbie here, first post.  I own rental properties and am acquiring more.  I am the property manager and maintenance/repair guy (my primary job) and want to qualify for REPS starting in 2024.  This thread has instilled the fear of gov (like fear of God, but with the government) regarding being audited.

    I think I understand what activities count towards REPS hours once I own a property.

    As a followup to Becca's post above, I am looking for clarity on activities specific to a property before I close its purchase.  Would appreciate feedback on the following activities that I personally undertake.  My guesses about whether the hours count towards REPS are in italics.

    1) Finding an investment property: Researching the real estate market, searching on Zillow, touring properties, working with a real estate agent to find a property.  Investment activities, not REPS hours.

    2) Getting into contract once a specific rental property is selected: Studying disclosure documents, writing up and negotiating an offer.  Investment activities, not REPS hours.

    3) Getting to close after the contract is executed: Working with title and escrow agents and lawyers; property inspections and walk-throughs; working with construction contractors if it's a new build; working on financing with a lender if borrowing or with an investment advisor if paying cash; working with a lawyer or registered agent to set up an LLC for the property; signing closing documents. REPS hours.

    4) Getting ready to rent the property pre-close but post-contract: Understanding HOA rules and incorporating them into proforma lease agreements; preparing and posting rental advertisements; shopping for, selecting, and purchasing furnishings to equip the house to be put on the rental market. REPS hours.

    0Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free