Real Estate Professional Status and Purchased Tax Credits

Published October 28, 2026. Many real estate investors ask whether real estate professional status (REPS) lets them use a purchased credit against any income. It is more limited than that.

What REPS does

Rental activities are passive by default (§469(c)(2)). If a taxpayer qualifies under §469(c)(7), the default no longer applies to rental real estate activities of that taxpayer for that year, and each interest is treated as a separate activity unless the taxpayer elects to group them.

The test has two parts, both required: more than one-half of the personal services performed in trades or businesses during the year are in real property trades or businesses in which the taxpayer materially participates, and the taxpayer performs more than 750 hours of services in those businesses (§469(c)(7)(B)). Material participation is tested under the seven tests, activity by activity.

What REPS does not do

• It does not make wages, stock gains or other portfolio income passive. Those still sit outside the passive category (§469(e)(1)).
• It does not remove the need to materially participate in each rental (or elect to aggregate).
• It does not change the §38(c) calculation for a C corporation.

How it affects a credit purchase

A purchased credit used by an individual is subject to the passive activity rules (IRS Transferability FAQs). If a REPS taxpayer's rentals are nonpassive, rental income is nonpassive too, which can reduce the amount of passive income against which a purchased credit may be used. The credit may still be usable against other passive income, such as K-1 income from activities in which the taxpayer does not materially participate.

Income	Passive?	Purchased credit can offset tax on it?
Rental with REPS and material participation	No	Generally no (nonpassive)
Rental without REPS	Yes	Generally yes
K-1 income from a business with no material participation	Yes	Generally yes
Wages, interest, dividends, stock gains	No	No

This table is a simplification; your facts control. The K-1 passive income guide and passive income documentation walk through the evidence.

Educational information only, not tax, legal or investment advice, and no outcome is promised. Figures were checked against the cited sources on October 28, 2026; confirm with your CPA before acting.