All Forum Posts by: Helen Jiang

@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

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?

@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.

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.

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.

I'm happy to chat about Pittsburgh...lived here all my life.

@Helen Jiang I am happy to chat about Cincinnati and the opportunities here. If you have any questions feel free to connect, best of luck on your search! 

@Helen Jiang

This question gets asked all the time, especially by folks based in California / LA like you are.  Just search for other threads, and you'll see many recommendations and lots of information on some of the places you mentioned.

For example, I own some rentals in Pittsburgh.  I would not at all consider Pittsburgh a "college town" the way, say, State College PA is. Rather, Pittsburgh is the center of Allegheny County and its own metro area, and has 300k people and lots of other industries.  Yes, there has been a huge population decrease since the 1960s.  I'm watching this too.  The pace of the decrease has slowed recently, and Allegheny County actually grew slightly between 2010 and 2020.  I don't know what's going to happen in the next 10 years.  It's a tough market to invest in - the housing stock is extremely old and there is tremendous variability within and among neighborhoods.

With all that said, I always recommend that folks at least try to get started in a market they can drive to. Why? Because you can go look at properties in person; go to REIA meetings in person; network in person; meet agents in person; take other investors to coffee in person; etc. Yes, no California market is going to be as cheap as Cleveland. Or Pittsburgh. But OOS investing is not an automatic slam dunk. What about Riverside County or another place within a couple hours of you? You could at least start with the activities I mentioned and see what happens. If you still feel like it's too expensive, you haven't lost anything and you've probably learned a bunch and made a bunch of contacts.

Thoughts?