Rental real estate is passive by default. Losses from passive activities can offset only passive income, so a landlord showing a $60,000 depreciation-driven loss usually watches it carry forward instead of reducing this year's tax bill. Real estate professional status under Section 469(c)(7) is the exception that lets qualifying investors use those losses against wages, business income, and other nonpassive income. It is one of the most valuable positions a real estate investor can hold, and one of the most commonly claimed incorrectly.

The two tests

Both tests apply every year, measured on the calendar year for most filers.

First, more than half of all personal services you perform in every trade or business during the year must go to real property trades or businesses: development, construction, acquisition, conversion, rental, management, leasing, or brokerage.

Second, you must log more than 750 hours in those real property activities during the year.

The first test is where full-time W-2 employees fail. An investor working 2,000 hours a year in a job outside real estate cannot put more than half of total service hours into real property, regardless of how many weekends the rentals consume. For married couples filing jointly, one spouse must pass both tests alone. Hours cannot be combined.

What counts as hours

Qualifying work includes acquiring properties, managing tenants, supervising renovations, and the day-to-day operations of the portfolio. Work done in your capacity as an investor, such as reviewing financial statements or monitoring performance in a non-managerial role, does not count unless you are directly involved in daily management. Time logged by a property manager you hired does not transfer to you.

Status alone changes nothing

Passing the two tests only opens the door. Each rental activity must still separately meet a material participation standard, most commonly 500 hours in that activity, before its losses become nonpassive. A grouping election lets you treat all your rental activities as a single activity for this purpose, but the election must be made on a timely filed original return. Investors who skip it sometimes discover the omission in an audit, years later.

Why this matters in October

The hour tests run on the calendar year. An investor at 500 qualifying hours today has roughly ten weeks of legitimate work left to close the gap: sourcing deals, overseeing a renovation, taking management back from a third party. What cannot be closed later is the record itself. Hours documented now hold up. Hours estimated next April tend not to.

The planning point is to run the numbers before December 31, while the facts of the year can still be managed. I have sat across from investors who assumed they qualified and learned in an exam that they did not. The ones who plan in October rarely get that letter.

This is general information, not tax advice for your specific situation. To find out where you stand for 2026, email info@skleincpa.com or call 732-683-1000.