Does the rehab managing time for a BRRRR count for 500 material participation REPS?

Question

Hi all!

As bonus depreciation might be returned 100%, I'm trying to figure out a plan to prepare for getting REPS in 2026. After hours of researching and consulting our CPA, I'm still confused.

We only have two LTRs, and they are both out of state. I'm uncertain about material participation in the rentals.

However, the projects we are working on are BRRRR projects, and I spent a lot of time managing the rehab period as the houses are very distressed. My CPA told me that those hours only count towards the 750-hour requirement, but not the material participation time for the rentals, because the rentals have not been placed in service yet. However, when I research online, I also see controversial opinions that those times count for the 500 hours material participation as long as, after the rehab, I put tenants in and turn the property into a long-term rental.

Does anyone work on BRRRR projects, knowing if that time counts for claiming real estate professional status? Without the rehab time, and with only two active rentals out of state, I don't know if we'd be able to log enough time for the claim REPS.

Thank you!

Dylan Brown · Answer

@Helen JiangTo answer one question:"It wouldn't matter if I held the property for more than a year or sold it sooner, and for less than a year. Is this correct?"Technically, you can take the depreciation still (as long as the property isn't placed in service and sold within the same calendar year - that would prevent depreciation from being taken). However, keep in mind that any depreciation you take will be recaptured (reversed) when you sell the asset - meaning each dollar of depreciation taken now equals an extra dollar of gain on the future property sale.  The depreciation recapture gain is potentially subject to slightly lower tax rates but if you are utilizing a cost segregation study, the vast majority of the depreciation recapture gain will be taxed just like ordinary income.  So if you are only planning on holding the property for a short while, the depreciation benefit will be largely nullified (unless you are hoping to trigger the depreciation in a year where you are in a higher tax bracket and recapture it in a year where you are in a lower tax bracket).There are a few strategies you can deploy to mitigate the gain, however those go beyond the scope of just a BP post.For this question:"Also, would the time spent on acquiring the property count? If we refinance the property, would the refinance time count? Will the time spent on legal issues count if the property is deeded into an LLC?"Keep in mind that all time making "investor decisions" such as due diligence, underwriting the deal, market research, and analyzing financials DO NOT count to the material participation test.  Also, "Financing" hours such as raising capital, refinancing loans, or financial underwriting are also not allowed to count toward hours.And of course any hours spent on financing or investor decision making actually count against you.Basically you can only count hours that truly benefit the rental operation itself, not the financing and/or capital structure.It sounds like you have a nuanced situation overall and with REPS audits on the rise, the best advice I can give you is to get a CPA FAST.  None of what I said here really can qualify as advice as I have not seen any of the specifics of your tax situation but you really need a strategist to get in there and (1) help determine if REPS is even the right path for you or if there are better strategies available to you, (2) help provide taxable income projections so that you understand your tax liability given varying scenarios, and (3) help you conduct the strategy so that you are "audit ready" in the event that you are audited in the future.

Michael Plaks · Answer

@Helen Jiang

My colleagues @Stephen Nelson and @Dylan Brown gave you excellent answers.

I want to add one critical aspect to the discussion: we need to make sure that the hours you have in mind are qualifying hours. Since the houses are out of state, what exactly do you mean by you managing the rehab process?

Dylan Brown · Answer

@Helen Jiang, I hear you—it can be confusing. Here’s a summary:

• Yes, rehab hours count toward your material-participation on that property, even if you don’t file a §469-9(g) grouping election.  Think of all your time managing permits, overseeing contractors, shopping for materials, inspecting work, etc., as part of the same rental activity—as long as you put tenants in by year-end.  If you do not place the property in service by the end of the year, then all these hours would be lost and not count for anything.
• Track “pre” vs. “post” service tasks in one log for that property: rehab work, then showings, leases, rent collection, maintenance, tenant calls, etc.  All go into your 500-hour bucket.
• Don’t forget the REPS hurdles: either you or a spouse must spend more than 50% of all their working time in real estate and 750+ hours in those trades or businesses.  If you’re juggling a full-time W-2 job, hitting both tests in one year is almost impossible on your own - sometimes a spouse strategy is the only way.

Yes, rehab hours count toward your material-participation on that property, even if you don’t file a §469-9(g) grouping election.  Think of all your time managing permits, overseeing contractors, shopping for materials, inspecting work, etc., as part of the same rental activity—as long as you put tenants in by year-end.  If you do not place the property in service by the end of the year, then all these hours would be lost and not count for anything.

Track “pre” vs. “post” service tasks in one log for that property: rehab work, then showings, leases, rent collection, maintenance, tenant calls, etc.  All go into your 500-hour bucket.

Don’t forget the REPS hurdles: either you or a spouse must spend more than 50% of all their working time in real estate and 750+ hours in those trades or businesses.  If you’re juggling a full-time W-2 job, hitting both tests in one year is almost impossible on your own - sometimes a spouse strategy is the only way.

Bottom line: rehab time isn’t “wasted”—it all counts toward that one property’s participation, but be sure you can prove both the 750-hour and 50% tests too. Good luck!P.s. I agree with @Stephen Nelson - you need to qualify for REPS AND you need to materially participate in the properties.  In your case, I think the material participation is going to be the harder challenge.  Either way, make sure you have a super detailed time log.

Stephen Nelson · Answer

That doesn't sound right. Maybe something got scrambled in the discussions?

You qualify for Section 469(c)(7) treatment, aka "REPS," if you spend more than 750 hours and more than 50% of your work time in a real property trade or business. Stuff like construction, development, property management, brokerage.

Thus if you spend (say) 751 hours rehab-ing a house (basically, then, in a construction business), you probably qualify for REPS. That means real estate rentals aren't "per se" passive. You may be able to treat them as nonpassive and then use deductions to shelter other income.

To then make real estate rental properties nonpassive, you (or you and spouse if married) need to materially participate in the rental or rentals using one of the methods from Reg. Sec. 1.469-5T(a). E.g., more than 500 hours, more than 100 hours and no spends more time, substantially all the hours etc.

Ashish Acharya · Answer

@Helen Jiang Great question, you're right to be strategic about REPS planning. The time you spend managing rehabs on BRRRR projects does count toward the 750-hour REPS requirement, as long as it's real estate work you materially participate in (e.g., project management, contractor coordination). However, those hours do not count toward the 500-hour material participation test for rental activities unless the property is already placed in service (i.e., available for rent). So while rehab time helps you qualify for REPS status overall, it won’t count toward material participation for a rental unless it’s rented that year. To bridge the gap, consider grouping your rentals or exploring STRs, which don’t require REPS but allow for material participation through other tests.

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.

Helen Jiang · Answer

Thank you, Ashish! Does this mean that if I can finish the rehab and put the property into service in the same tax year, then the time I spent on this specific rental can be counted towards the 500-hour material participation test for rental activities? This will make a huge difference for me, as we only have two rentals, and it's hard to accumulate the 500 hours if I choose to aggregate.

Helen Jiang · Answer

Thanks for bringing this up, Michael! Yes, as mentioned, we hired a GC, but this is an extremely distressed house and needs almost a down-to-studs renovation. I'm managing the GC, following up work schedule, making design decisions, hiring a consultant and inspector, communicating with the city, utility companies, and more... I assume those times should count towards the material participation in rehab. Is it correct?

Also, for the specific 500 hours of material participation in the remote rentals, now I understand that rehab hours count, and leasing and operating the rental day-to-day count. Also, would the time spent on acquiring the property count? If we refinance the property, would the refinance time count? Will the time spent on legal issues count if the property is deeded into an LLC?

Thank you so much for your kind advice!

Helen Jiang · Answer

It's good to know that if I put the property into service within the same tax year, I could count those hours towards the 500 material participation in rentals. It wouldn't matter if I held the property for more than a year or sold it sooner, and for less than a year. Is this correct?

Also, for the specific 500 hours of material participation in the remote rentals, now I understand that rehab hours count, and leasing and operating the rental day-to-day count. Also, would the time spent on acquiring the property count? If we refinance the property, would the refinance time count? Will the time spent on legal issues count if the property is deeded into an LLC?

Sorry for so many questions. Thanks so much for your clarification! I was quite confused.

Helen Jiang · Answer

Thanks so much for your response, Stephen! It seems that what they said is incorrect, as you explained.

Does the rehab managing time for a BRRRR count for 500 material participation REPS?

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