When it comes to real estate investing, one of the most powerful tax strategies available is leveraging real estate professional (REP) status under the Internal Revenue Code. REP status allows taxpayers to convert otherwise passive rental losses into active deductions that can offset wages, business income, and other active income.
A recurring question is: what if only one spouse qualifies as a real estate professional, but the other spouse owns most of the real estate interests?
Surprisingly to many, the IRS and the courts have made it clear: if you file jointly, REP status applies to the household, not just the individual spouse.
The Power of REP Status
Under IRC §469(c)(7), a taxpayer qualifies as a real estate professional if:
They spend more than 750 hours per year materially participating in real estate trades or businesses, and
More than 50% of their personal service time is devoted to real estate activities.
If these tests are met, rental activities are no longer automatically passive. That means depreciation (including from cost segregation and bonus depreciation) is not trapped by passive activity loss rules — it can be used against other active income.
Spouses Filing Jointly: One Qualifies, Both Benefit
Here’s the key: under Treasury Regulation §1.469-9(c)(4), the REP tests are applied at the joint return level.
If either spouse meets the REP tests, the couple as a whole is treated as real estate professionals.
Material participation of one spouse is attributed to both.
As a result, all rental activities reported on the joint return can be treated as non-passive.
What the Courts Have Said
Glick v. United States (1996)
In Glick v. United States, the husband owned most of the real estate, but the wife was the one who actively managed the properties. The IRS argued the losses should remain passive because the ownership rested with the husband.
The court disagreed, holding that REP qualification is tested at the joint return level. Because the wife met the REP requirements, the couple’s rental activities were treated as non-passive, and the deductions were allowed.
Parker v. Commissioner (2012)
In Parker v. Commissioner, the Tax Court reinforced the same principle. Even though the ownership and hours didn’t line up neatly between spouses, the court reiterated that REP status is determined on a household basis for joint filers.
IRS Audit Guidance
The IRS Passive Activity Loss Audit Technique Guide makes this explicit as well: for married taxpayers filing jointly, “the real estate professional tests are applied at the joint return level, not separately for each spouse.”
Practical Example: The 1% / 99% Split
Consider this scenario:
Wife qualifies as a real estate professional and materially participates in the rental activity.
She owns 1% of an LP that owns rental property.
Husband owns 99%.
A cost segregation study generates $300,000 in first-year bonus depreciation.
By default, 99% ($297,000) of the depreciation flows to the husband’s K-1, and 1% ($3,000) to the wife’s.
Ordinarily, the husband could not use those losses against active income, because he isn’t an REP. But because the wife qualifies and they file a joint return, the entire $300,000 is treated as non-passive.
Planning Opportunities and Cautions
Ownership Percentages Don’t Block REP Benefits. Even if the REP spouse owns only a sliver of the entity, the REP exception applies to the whole return.
Document Hours Rigorously. REP status is one of the IRS’s most audited areas. Detailed contemporaneous logs are essential.
Substantial Economic Effect. Partnership allocations must reflect real economics (capital contributions, profit sharing, risk of loss). Extreme allocations that lack substance may be challenged.
Short-Term Rentals Exception. If the property is operated as a short-term rental (average stays <7 days), special material participation rules apply that can create opportunities even without REP status.
Conclusion
The real estate professional exception is one of the most powerful tools in the tax code for active real estate investors. And for married couples, it’s even more flexible: if one spouse qualifies, both spouses reap the benefits on their joint return.
This means that even if the REP spouse owns only 1% of an entity — while the non-REP spouse owns 99% — the couple can still unlock the full value of accelerated depreciation and cost segregation studies.
For investors, this creates significant planning opportunities — but also calls for careful structuring, well-drafted operating agreements, and meticulous recordkeeping to withstand IRS scrutiny.
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