REP status of spouse, passive losses for me?

Question

My wife is a realtor and works full time in that role, so she qualifies as a REP. I am a W2 worker and do not qualify as a REP. We file our taxes jointly.

A friend and I own 2 rental properties as part of a 2 member LLC. My wife is not a member of the LLC and does not participate in managing the 2 rentals. Does my wife's REP status allow me to deduct passive losses from the 2 rentals properties against our active income, or does the fact that she does not materially participate in managing the rentals prevent us from doing that?

Jason Malabute · Answer

On the positive side: Since you and your wife file a joint return, her status as a Real Estate Professional applies to the return as a whole. That means you’re not blocked from using her REP qualification just because you personally don’t meet the test.

Where it gets tricky: Even with her REP status, the IRS still requires that you materially participate in these specific rentals before the losses can be treated as non-passive. When there’s another partner in the deal who’s also actively involved, proving enough participation can become more complicated. The rules look at actual hours and involvement in that particular activity—not just whether one spouse is a REP.

So REP status opens the door, but material participation for these rentals is still the hurdle to clear.

Adam Wachter · Answer

Thanks Michael.
Good news: I believe I meet the material participation test based on my involvement in acquiring and managing the properties, coordinating rehab, and doing the bookkeeping. I've spent far more than 100 hrs on the properties this year, and my partner has spent only a fraction of that time. He's a realtor himself so he meets REP status independent of his involvement in managing these properties.

Rohullah Sharifi · Answer

The first step is to add her as a partner in the entity. Once she is formally included in the partnership, she should be designated as a general partner. From there, you can adjust the ownership percentages—reducing yours and increasing hers—to allocate rental losses in a way that aligns with your overall tax strategy and maximizes the potential benefits.

REP status of spouse, passive losses for me?

REP status of spouse, passive losses for me?

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