REPS Pitfall With Material Participation

By Jason Watson, CPA
Posted Sunday, March 22, 2026

If you meet the 750-hour requirement and more than half of your personal services are performed in real property trades or businesses, you qualify as a real estate professional. However, and as a reminder, to have your rental activities be considered nonpassive (so your rental losses are nonpassive), you must materially participate in your rentals. Yes, this is nuanced.

For example, many licensed real estate agents can easily satisfy the REPS hours test for being a real estate professional. However, they might not spend enough time on their own personal rental properties or rental activities, and therefore cannot prove material participation (MP hours).

Material Participation Trap

As we’ve mentioned a whole bunch, do not confuse your 750-hour REPS eligibility test with the material participation test for a specific rental property. Time spent acquiring a property can generally counts toward your overall 750-hour REPS threshold, but it does not count toward the hours needed for material participation on that specific property until it is placed in service.

There is, however, a critical material participation exception for real estate investors who are expanding an existing rental portfolio. If you make the formal election under Treasury Regulation Section 1.469-9(g) to treat all your rental real estate interests as a single activity, the landscape changes in your favor.

Why? Courts often view acquisition work as preliminary investment activity rather than participation in an existing rental activity unless the taxpayer has grouped their rental properties into a single ongoing activity.

Because the aggregated single activity is already a going concern, the time spent shopping for and acquiring a new property is viewed as expanding an existing business rather than starting a new one from scratch. In this grouped scenario, your acquisition hours may count toward material participation in the grouped activity and also count toward your 750-hour REPS requirement.

Spouse Hours For Material Participation

Spouses cannot combine hours to satisfy the 750-hour real estate professional test. Got it.

However, both spouses can contribute to the material participation requirement. Your spouse could be the 750 big shot and throw a hammer from time to time on your gaggle of rental properties. You can splash some paint on the walls as well. Both the hammer and the paint count for material participation for your spouse’s ability to materially participate in the rental activities.

Regulations 1.469-9(g) Election for REPS

We discussed this in a previous section when reviewing material participation. Here is a brief summary again-

You can elect to treat all your rental real estate interests as a single activity so that material participation is measured across the entire portfolio. If you had three separate rentals and relied on the 500-hour material participation test, you would need to satisfy that test for each property individually. That’s 1,500 hours total at a minimum.

The Treasury Regulations Section 1.469-9(g) election is a formal election on the tax return that endures each year unless revoked.

Sidebar: There is another sliver of business activity where the average guest stay is 30 days or less and you provide significant personal services such as daily linen changes, concierge services, bed and breakfast arrangements, etc. We won’t muddy the waters with that here, but it’s worth noting that the 7-day rule isn’t the only exception to the grouping party.

However, and this is a big deal, you generally cannot group short-term rentals with average guest stays of 7 days or less with traditional rental real estate activities (such as your mid-term and long-term rentals). Wait, what? Short-term rentals, as defined just now, are not considered rental activities under Treasury Regulations §1.469-1T(e)(3)(ii). In other words, you cannot mix apples and oranges with this grouping election. Group short-term rentals for STR loophole, and group other rentals for REPS.

Are there other downsides to the election? Yes there are. Again, please check out the section above. There is a ton more to it than what we listed here.

Material Participation Time Examples

See our material participation time examples section or a list of tasks and efforts spent on your rental property that count for REPS material participation.