Real Estate Professional Status allows rental real estate losses to potentially be treated as non-passive — but it does not eliminate the material participation requirement.

I recently spoke with an investor who qualifies for REPS. He actively manages his own rental properties and properly uses depreciation to offset his income. That approach is generally sound.

However, he was also using depreciation from real estate syndications—where he is a passive LP—to offset income as well. That is where the issue arises.

REPS does not cause all real estate depreciation to escape the passive loss rules. A grouping election also does not replace material participation.

For syndication losses to be treated as non-passive, the IRS looks for substantive operational involvement, including real authority and decision-making control. Passive investment alone is not sufficient.

If challenged, approval from a CPA is not a substitute for facts. The standard is whether the position is defensible under audit.

This is a nuanced area of the tax code and one that deserves careful attention.