Can my non-W2 wife manage my SFH remotely and achieve REPS or STR loophole?

Question

Hello, reaching out for advice.

I've got a SFH in a nice area of Pensacola, FL that I think would make a good STR. I've been reading about the advantages of REPS and offsetting my W-2 income if we file married-jointly with her being the sole REP. She would have to manage the property remotely, as we are a military family and I'm stationed in Japan for the next few years. This would call for hiring an on-site manager in the Pensacola area, so she would have to break the 500 hour material participation rule for the STR-loophole, or maybe breaking the 750-hour participation rule for full REPS is better? My plan is to start a website and market the property on it and some social media platforms in addition to supervising on-site management to complete the necessary day-to-day requirements of the property, screening and selecting tenants, etc. Then, we meticulously log the hours in an Excel doc in the event the IRS attempts to audit us. We think this is achievable, even with the time difference between Japan and FL.

Also, we have a few MFHs in Texas that we pay a lot of repairs/maintenance, insurance, and property tax on, but they're long term rentals. Would my wife achieving REPS or the STR-loophole with the SFH property allow us to also use those MFH LTR losses to offset my W-2 income?

Thanks for any advice. I've been a long time patron of BP, the community here has always been extremely helpful.

Amber Stout · Answer

Hey Anthony – love the strategic thinking here, and thank you both for your service.

From my understanding for STR, the 500 hour participation rule applies (vs. 750 for full with LTRs). If your wife hits that threshold and avoids using a property manager who takes on too much of the active role, it’s potentially viable.

Happy to connect you with a CPA who really gets this space if you'd like. I’m a mortgage broker/investor and run into this often.

Stephen Nelson · Answer

You can't qualify for REPS using STRs. Oddly, per the regs, STRs aren't real estate.

But if you were going to use either REPS or STRs to do this? To get big tax deductions? STRs would be easier probably. You only need to materially participate with STRs to get BIG tax savings. And you might be able to do that with 101 hours if you structured the investment perfectly. Or in special cases like for a property acquired late in the year, with 5-10 hours. (This material participation would probably need to include spouse going to property sometime during the year to do on-site hours of work among other things.)

Ashish Acharya · Answer

@Anthony Alexander Yes, your non-W-2 wife can qualify for either REPS or the STR loophole, even while managing remotely from Japan, as long as she materially participates. For the STR loophole, she must meet one of the IRS’s material participation tests (e.g., 500+ hours or 100+ hours and more than anyone else) on a property with average stays of 7 days or less, which would allow losses to offset your W-2 income without needing full REPS. For REPS, she’d need to spend 750+ hours per year and more than 50% of her working time on real estate, and if achieved, all rental losses, including from your long-term rentals in Texas, could offset your W-2 income. Remote management is fine if she’s doing real, hands-on work (e.g., marketing, guest messaging, managing vendors), not just oversight. Logging hours and activities meticulously is critical. The STR loophole is more achievable remotely and offers immediate tax benefits, while REPS unlocks broader loss usage across your portfolio. You should be serious about the hours and type of work she is going to do.This post does not create a CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.

Mohamed Youssef · Answer

I don't think this will be discussed anywhere in the tax code, but from what I know from reading court cases and hearing other people talking about it, is that it will be very hard to convince the IRS of meeting the requirements for either REPS or STR loophole remotely and having a PM in place. I personally vote against it, but I could be wrong.

Joshua Thompson · Answer

Hey @Anthony Alexander! I remember that Japan to US time difference, it was tough but definitely possible. I was stationed in Okinawa for awhile, it was a good time. The STR and REPS have two different set of tests and depending on someones situation you'll either qualify for both, one, or neither. You may not even need both.

The hours accumulated for your rental properties in TX could be used to qualify for REPS. When it comes down to material participation you'll want to consider the grouping election.

Both REPS and STR will have their own tests. REPS would be great if you qualify but if you don't then the STR "loophole" is the next best thing for the properties that would qualify.

Can my non-W2 wife manage my SFH remotely and achieve REPS or STR loophole?

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