Published by AE Tax Advisors Team • 2026-08-23

REPS Qualification Unlocks $300,000 in Rental Losses

The Client

Thomas and Diana Ruiz owned a portfolio of 14 rental properties across Memphis, Tennessee and Little Rock, Arkansas with a combined value of $4.2 million. Diana managed all properties full-time while Thomas earned $280,000 as a corporate attorney. Annual rental losses (driven primarily by depreciation) totaled $180,000 per year.

The Problem

For three years, their CPA had suspended all rental losses as passive, accumulating $540,000 in suspended passive losses. Diana spent over 2,000 hours per year managing the portfolio, but the CPA never explored Real Estate Professional Status (REPS) qualification and did not know that REPS could reclassify rental losses as non-passive.

Our Strategy

We documented Diana's REPS qualification -- she spent over 2,000 hours in real estate activities (well above the 750-hour threshold) and more than half her working time was in real estate (she had no other job). We filed a grouping election to treat all 14 properties as a single rental activity. We then amended three years of returns to release the suspended losses. We also performed cost segregation studies on the four highest-value properties, generating an additional $320,000 in catch-up depreciation through Form 3115.

The Results

The REPS qualification released $300,000 in deductible losses in the current year -- $180,000 from the current year's rental operations and $120,000 from the cost segregation catch-up adjustment. The amended returns for prior years recovered an additional $95,000. Combined current and prior year tax savings exceeded $130,000.

Key Takeaway

Real estate investors with a spouse who manages properties full-time should always evaluate REPS qualification. The ability to deduct rental losses without passive activity limitations can save tens of thousands annually, and accumulated suspended losses can be released retroactively.