The § 469(c)(7) gate that makes ALL rental losses non-passive — cost segregation against W-2 income hinges on it. Two hour tests plus material participation, with the citations.
Count hours in real property trades or businesses in which you materially participate — development, construction, acquisition, rental operation, management, brokerage (§ 469(c)(7)(C)). Hours as a W-2 employee only count if you own more than 5% of the employer.
Married filing jointly?
One spouse must meet BOTH hour tests alone — spouses can't combine hours for the 750-hour or more-than-half tests (§ 469(c)(7)(B), flush language). Material participation, by contrast, does count both spouses' work.
Enter your hours to see whether you qualify.
750-hour test — § 469(c)(7)(B)(ii)
0 hours in real property trades (needs more than 750)
More-than-half test — § 469(c)(7)(B)(i)
Share of all personal services in real property trades
Material participation in the rentals — § 1.469-9(g)
Per rental activity, or one election aggregating them all
Why this matters
Rental real estate is passive by definition (§ 469(c)(2)) — losses can't touch W-2 income no matter how large. REPS removes that per-se rule for the taxpayer. Save the verdict and the Forecaster treats every rental in the same tax year as non-passive, letting cost-seg depreciation offset ordinary income.
Keep a contemporaneous hour log — REPS is among the most-audited positions in real estate, and reconstructed logs routinely lose in Tax Court.