What hours do CPAs usually throw out when reviewing REPS or STR logs?

Question

I know things like listening to real estate podcasts or scrolling Zillow don't count toward REPS or the 100-hour STR rule.

For those of you who have gone through a CPA review or an audit, what are the grey-area tasks that your CPA told you to remove from your time log? Trying to make sure people aren't counting hours all year only to find out in March that 30% of their log doesn't qualify.

Michael Plaks · Answer

A flawed question, in my opinion. We CPAs do not "throw out" your hours. The IRS does, and the courts do.

What we do is warn our clients about hours that are vulnerable. And I recommend building a cushion of hours, so losing a few of them would not place you under the threshold.

Sammy Habbaz · Answer

The way I tell clients to think about it: is the task essential to the ongoing business of the rental? Common areas that the courts dissalowed.

• Education (like you mentioned).
• Non direct travel. Local trips to the property for a specific task are generally fine. Time spent flying to the property or commuting to and from an office isn’t.
• Finding deals & underwriting. Hours generally start close to closing. If not after. Searching for and analyzing deals you aren’t yet committed to doesn’t count toward the rental.
• supervising property managers. With a handful of properties, this rarely holds up, because the PM handles the day-to-day and you’re mostly monitoring. With 10 or more, there’s usually enough real management on your end that it becomes more defensible.

Education (like you mentioned).

Non direct travel. Local trips to the property for a specific task are generally fine. Time spent flying to the property or commuting to and from an office isn’t.

Finding deals & underwriting. Hours generally start close to closing. If not after. Searching for and analyzing deals you aren’t yet committed to doesn’t count toward the rental.

supervising property managers. With a handful of properties, this rarely holds up, because the PM handles the day-to-day and you’re mostly monitoring. With 10 or more, there’s usually enough real management on your end that it becomes more defensible.

Aaron Zimmerman · Answer

I’d recommend your cpa be reviewing your hours at least twice throughout the year to ensure you’re on track.

The benchmark is does this activity move my business forward. Assuming rentals are the only activity, things like education would not count as an example. Investor hours such as finding and analyzing deals would also not count. There’s others but those are pretty common.

Hubert Grzesiak · Answer

Thanks both, really clear breakdown.

@Sammy Habbaz point #3 on underwriting and deal searching not counting before you're committed to the deal is a big one. Easy to see how someone could log 100+ hours analyzing properties they never end up buying and think they're safe. The distinction between local trips for a specific task vs flying out is really helpful too.

@Aaron Zimmerman checking the log twice a year with a CPA makes total sense. Finding out in March that a bunch of your hours were "investor" hours instead of operational hours is way too late to fix.

Ashish Acharya · Answer

Hubert, the point about checking the log during the year is probably the biggest takeaway here. I’d much rather see someone review their activities in June or September and realize they need to change how they’re spending their time than discover in March that half the log was based on activities that were never going to hold up.

I’d also avoid building the log around hitting exactly 100 or 750 hours. Build a cushion and document the actual work as you go, including the property or activity, what you did, and roughly how long it took.

For investors with multiple activities, I’d also keep the hours separated by activity rather than putting everything into one general “real estate” bucket. That makes it much easier to see what you're actually participating in and gives the CPA something meaningful to review.

The goal shouldn't be to find enough hours to qualify. It should be to build a record that accurately reflects the work you're actually doing and then determine whether the facts support the tax position.

Feel free to DM me, I’d be happy to send over a few resources that might be helpful.

Michael Barnes · Answer

Another area to be cautious of is when tasks take longer than would be normally considered reasonable. In this situation be sure to document WHY that task took longer than would normally be expected. Also if possible try not to rely on these hours to hit a given threshold.

Jason Malabute · Answer

A good rule of thumb is that a log should only include time spent actually running the rental. The hours that tend to get challenged are education, travel that isn't tied to a specific task at the property (a local trip to deal with a contractor is much easier to defend than a flight or a commute), time spent hunting for and analyzing deals you haven't committed to yet, and passive oversight of a property manager. Technically it's the IRS and the courts that toss hours, not your CPA, so build a cushion above the thresholds so losing a few hours doesn't sink you, and have your CPA look over the log a couple of times during the year instead of finding problems in March. Are you aiming for REPS, the short-term rental hour tests, or both? The exact answer depends on your facts, so run it by your own CPA or tax advisor.

Hubert Grzesiak · Answer

Thanks for info @Michael Plaks you are absolutely right

What hours do CPAs usually throw out when reviewing REPS or STR logs?

What hours do CPAs usually throw out when reviewing REPS or STR logs?

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