Jennifer and Paul Tessmer Tuck once had significant tax liabilities.
“My biggest expense each year is definitely state and federal taxes,” Jennifer, who works as a physician in Minneapolis, shared. Their financial situation shifted when they began investing in real estate. They discovered a specific IRS designation known as Real Estate Professional Status (REPS), which allows individuals to offset rental losses, typically classified as passive income, against active earnings, like wages from a job.
For couples, just one partner needs to meet the qualifications, enabling the couple to utilize the losses to reduce their combined taxable income. This strategic method is sometimes referred to as the “marriage loophole” by tax professionals and investors.
“As a married couple, if one of us qualifies as a licensed real estate professional, we can combine our real estate losses with my W-2 income, which really benefits us as high earners,” Jennifer explained. In their case, Paul qualifies for REPS.
Understanding REPS
Typically, rental property losses are only applicable against passive income. So, if you’re an accountant investing in rental properties, your losses can offset rental income, but not your salary as an accountant. The IRS sees these as different categories of income.
However, REPS changes that landscape. If one spouse is recognized as a real estate professional and is actively involved in rental activities, they can use those losses to reduce active income, including wages.
To take advantage of the tax benefits, investors need to demonstrate they have incurred losses. Real estate can provide positive cash flow alongside a reported tax loss because one can deduct depreciation and other related costs.
For Tessmer and Tuck, who acquired 16 properties from 2020 to 2026, the tax advantages connected to REPS were substantial.
“Getting to pay less state and federal taxes while also generating rental income can significantly improve your finances,” Jennifer noted.
Who Can Qualify for REPS?
Eligibility for REPS hinges on how much time one devotes to real estate activities. Two main criteria must be satisfied:
- Must dedicate at least 750 hours a year to real estate tasks.
- Over half of your total work hours need to be spent in the real estate sector.
For the Tessmer Tuck duo, this meant making substantial lifestyle changes. Paul, previously an elementary school teacher, cut back on his part-time job.
“Then I focused the remaining time on property renovations,” Jennifer mentioned. This influenced their strategy as they sought single-family homes needing minor renovations, allowing Paul to log sufficient time on each property. They tackled everything from installing vanities to kitchen remodels.
Doctors Leticia Alto and Kenji Asakura, who downsized their roles in hospitals after amassing a large rental portfolio, managed to use REPS to eliminate their income taxes for seven years, hastening their journey toward financial freedom.
Asakura shifted to part-time work at a hospital starting in 2015. Notably, only one spouse needs to qualify, meaning Alto can continue her clinical role while deducting real estate losses from her income.
It’s crucial to keep track of time spent in these activities. CPA Christel Espinosa remarked that REPS qualifies for stringent examination by the IRS.
“You can hold other jobs, but if you face an audit, you need solid proof that real estate is your primary occupation,” she added.
