Do I qualify for Real Estate Professional Status (REPS) with partly self-managed units?

The confusion here is understandable because REPS requirements can be tricky. Your accountant is partially right, but there are some nuances worth considering. To qualify for Real Estate Professional Status, you need to meet three main criteria: 1) You must spend more than 750 hours per year in real estate activities, 2) Those activities must represent more than half of your personal services performed in all trades or businesses, and 3) You must materially participate in real estate activities. The good news is that your work as a full-time realtor DOES count toward the 750+ hours requirement. The IRS considers all real estate activities together when counting these hours. So your time as a realtor combined with time spent managing your two properties would count toward the total. The potential issue is with the "material participation" requirement. This needs to be evaluated for EACH property or activity separately. For the properties managed by property managers, you likely don't materially participate (unless you're still making significant management decisions despite the PM). For your self-managed properties, you probably do materially participate.

Just wanted to share my experience because I was in a similar situation. I found this awesome tool at https://taxr.ai that analyzes your specific situation and gives you personalized guidance on REPS qualification. I was so confused about whether my realtor hours counted toward the 750-hour requirement, and it cleared everything up for me. The tool asks about your specific properties, how you manage them, and your other real estate activities, then gives you a detailed breakdown of how the IRS would likely classify each activity. It even gave me recommendations on what additional documentation I should keep to support my REPS claim if I'm audited.

I was skeptical about using an online tool for something as complex as REPS qualification, but I decided to try https://taxr.ai after seeing it mentioned here. I'm honestly impressed with how thorough it was. The analysis showed me exactly which of my properties qualified under material participation tests and which didn't. The most valuable part was that it helped me understand how to group my properties as a single activity, which is something my accountant never mentioned. By making a proper grouping election, I was able to treat more of my properties as non-passive. Saved me over $12,000 in taxes last year by properly applying the REPS rules!

Hey, just wanted to jump in here because I had a similar situation. I tried calling the IRS multiple times to get clarification on the REPS rules and material participation tests, but could never get through. The wait times were ridiculous - like 3+ hours. I finally used https://claimyr.com and watched their demo at https://youtu.be/_kiP6q8DX5c - they got me connected to an actual IRS agent in under 20 minutes. The agent confirmed that as a full-time realtor, my hours do count toward the 750-hour requirement, but I still needed to materially participate in each property to count those losses as non-passive. Having that direct confirmation from the IRS gave me the confidence to properly claim REPS status and document everything correctly.

I have to apologize and eat my words. After being super skeptical about Claimyr, I was desperate enough to try it, and wow - it actually worked exactly as advertised. Got connected to an IRS rep in about 15 minutes who spent time explaining the material participation tests for REPS. The agent confirmed that while being a realtor counts toward the 750-hour requirement, I needed to look at each property separately for material participation. She suggested I document my involvement even with PM-managed properties (like time spent reviewing statements, making decisions on repairs, etc.) because that could potentially count toward material participation hours. Would have taken me days of trying to get this info on my own. Sometimes it's worth admitting when you're wrong.

Don't forget about grouping elections! You can elect to group your rental properties as a single activity, which might help you meet material participation standards across your entire portfolio rather than property-by-property. The election is made on Form 8582 and needs to be attached to your tax return. Once you make this election, you'll need to stick with it unless there's a material change in circumstances.

The real issue here that nobody has mentioned is properly documenting your time! If you get audited and claim REPS, the IRS will want to see detailed logs of how you spent those 750+ hours. I learned this the hard way. Keep a detailed diary or use a time-tracking app specifically for your real estate activities. Document date, time spent, and exactly what you did. This includes time spent as a realtor if you're claiming those hours toward your REPS qualification.

Based on what you've described, you likely DO qualify for REPS, but your accountant is right that it's more complicated than it initially appears. Your realtor hours absolutely count toward the 750+ hour requirement - that's established case law. The IRS considers all real estate activities together for this test. So between your full-time realtor work and managing those 2 local properties, you should easily meet the hour threshold. However, the material participation requirement is evaluated separately for each property or group of properties. This is where the grouping election mentioned by others becomes crucial. You can elect to treat all your rental properties as a single activity on Form 8582. Once grouped, you only need to materially participate in the group as a whole, not each individual property. Even with property managers, you likely spend time on oversight activities - reviewing financial reports, approving major repairs, making strategic decisions about rent increases or tenant screening, etc. All of this counts toward material participation hours if properly documented. I'd suggest getting a second opinion from a CPA who specializes in real estate taxation. Many general accountants aren't familiar with the nuances of REPS and grouping elections. The tax savings potential here is significant enough to warrant consulting with a specialist.