What the IRS Actually Requires for REPS
If you own rental properties in another state, or multiple states, you've probably wondered whether you can still qualify for Real Estate Professional Status.
The short answer: yes, you absolutely can.
There's nothing in the tax code that says your rentals need to be in the same state where you live. The IRS doesn't care about geography. They care about hours, participation, and documentation.
But here's where it gets tricky. Out-of-state rentals create real challenges when it comes to proving material participation, and that's exactly where most investors get tripped up during an audit.
I've managed properties across multiple states for over 17 years while qualifying for REPS annually. So let me walk you through what actually matters, where the risks are, and how to set yourself up for success.
Before we talk about out-of-state specifically, let's make sure the foundation is clear. To qualify for Real Estate Professional Status under IRC Section 469(c)(7), you need to meet two tests every single year:
Test 1: The 750-Hour Test. You must spend at least 750 hours performing services in real property trades or businesses in which you materially participate. That works out to roughly 14.5 hours per week.
Test 2: The More-Than-Half Test. More than 50% of all the personal services you perform across all trades and businesses must be in real property trades or businesses.
Then, and this is critical, you also need to demonstrate material participation in each rental activity where you want to claim non-passive losses. If you own multiple properties, you'll almost certainly want to make a grouping election so the IRS evaluates all your rentals as a single activity instead of property by property.
Notice what's not in those requirements? A zip code. A state. A requirement to live next door to your rental.
Why Out-of-State Rentals Make It Harder
So if geography doesn't matter on paper, why does everyone warn you about out-of-state rentals?
Because the IRS looks at the practical reality of your involvement. And when your properties are 1,000 miles away, some investors fall into a pattern of being completely hands-off, just collecting a monthly PM statement and calling it a day. That's the danger zone.
To be clear: you don't have to physically be at your properties to materially participate. Setting rent prices, approving repair estimates, comparing vendor bids, directing your property manager, making decisions on tenant applications, and overseeing operations remotely all count. The IRS cares that you're actively making decisions and directing operations, not that you're personally swinging a hammer.
The real risk with out-of-state rentals is that investors outsource everything, including the decision-making, and then have nothing to show for their involvement. Occasional check-ins and passive review of a PM report don't cut it.
Here's the other problem: travel time to your properties generally doesn't count toward your REPS hours. The IRS views travel as a commute, not a qualifying activity. So those flights and road trips to check on your units? They're deductible expenses, but they won't help you hit 750 hours.
How to Qualify for REPS with Out-of-State Properties
If your rentals are out of state, you're not disqualified, but you need to be more intentional and more strategic. Here's what works.
Be the Decision-Maker, Not a Passive Owner
You don't have to self-manage every property to qualify for REPS. Plenty of investors use property managers for their out-of-state rentals and still qualify, as long as they stay actively involved in the decision-making.
What does that look like from a distance? Setting and adjusting rent prices based on your market research. Reviewing and approving tenant applications. Comparing repair estimates and choosing vendors. Approving maintenance over a certain dollar threshold. Directing your PM on lease terms, renewal strategies, and turnover timelines. Reviewing financials and making operational changes, not just reading a report, but actually acting on what you see.
The key distinction: you're directing operations, not delegating them entirely. Your PM is executing your decisions, not running the show independently. That's the line between an active owner who qualifies for REPS and a passive investor who doesn't.
If your PM handles everything and you barely lift a finger, you'll struggle to prove material participation no matter how many properties you own. But if you're the one calling the shots and your PM is your boots on the ground? That's a defensible position.
For more on what qualifies as material participation, check out our full breakdown of the seven material participation tests. And for a deeper dive on structuring a PM relationship that supports REPS, read our guide on qualifying for REPS with a property manager.
Use a Local Rehab as an Hour Accelerator
One of the most effective strategies for out-of-state investors is to buy a local property that requires significant renovation. When you GC the project yourself (pulling permits, sourcing materials, scheduling and overseeing contractors, performing inspections, and even doing some of the work) you can accumulate hundreds of hours relatively quickly.
If you then make a grouping election and combine this local rehab with your out-of-state rentals, you've got a much stronger case for material participation across the entire group.
This works because the IRS evaluates your real estate hours in aggregate across all your real property trades or businesses. Your rehab hours count toward the 750-hour threshold and the more-than-half test, alongside whatever hours you're logging on your out-of-state rentals.
Just remember: the rehab property must be rented out by the end of the year for it to qualify as a rental activity. If it's still under construction on December 31st, it's not a rental activity yet, and you can't group it with your other rentals.
Make the Grouping Election
If you own multiple properties, especially in different states, the grouping election under Reg. 1.469-9(g) is essential. Without it, the IRS evaluates material participation separately for each property. For most out-of-state investors, passing that test on individual distant properties is nearly impossible.
By grouping all your rentals into a single activity, you only need to prove material participation once for the entire group. This is a game-changer.
You make this election by attaching a statement to your timely filed tax return. It's binding once made (unless you revoke it), so talk to your CPA before filing. And if you missed the deadline, Rev. Proc. 2011-34 may allow a late election with reasonable cause.
Document Everything, Obsessively
This is where most out-of-state investors fail. Not because they don't do the work, but because they can't prove they did the work.
The Tax Court has consistently held that vague estimates and after-the-fact logs don't hold up. You need contemporaneous records: daily or near-daily time logs showing dates, specific tasks performed, time spent, and which property the work was for.
This is exactly why I built REPS Time. I got tired of spreadsheets and trying to reconstruct my hours at year-end. The app lets you log activities in real time, including voice logging, so your documentation is always current and audit-ready.
When you're overseeing properties remotely, your documentation becomes even more important. Keep your emails, texts with contractors and PMs, phone logs, bank and credit card statements, and calendar entries. All of it should tell a consistent story that backs up your time log.
What Counts as Hours for Out-of-State Properties
Here's a practical list of remote activities that typically qualify, whether you self-manage or oversee a PM:
- Setting and adjusting rent prices based on market research
- Reviewing and approving tenant applications
- Comparing repair estimates and approving work
- Directing your PM on operational decisions (lease terms, vendor selection, turnover strategy)
- Advertising vacancies and responding to inquiries
- Drafting and negotiating lease agreements
- Communicating with tenants about issues, renewals, and move-outs
- Reviewing property financials and making operational changes
- Researching and comparing insurance, vendors, and service providers
- Managing turnover logistics and cleaning schedules
- Handling rent collection and dealing with late payments
- Researching local market conditions for pricing decisions
What generally doesn't count: passive review of monthly statements, education and research unrelated to current operations, investor-type activities like analyzing new deals, and travel time.
The Spouse Strategy for Out-of-State Investors
If you're married and filing jointly, only one spouse needs to qualify as the real estate professional. This is one of the biggest advantages for couples where one partner has a demanding W-2 job.
If your spouse can dedicate their time to overseeing the rental portfolio, including the out-of-state properties, they can qualify for REPS on behalf of the household. The high earner's W-2 income can then be offset by rental losses.
This works especially well when one spouse doesn't have outside employment or works part-time. It's one of the most common REPS strategies among investors I coach in the ROI Inner Circle, and it's how many families with out-of-state portfolios make the math work.
Learn more about how stay-at-home spouses can qualify in our guide: The Stay-at-Home Parent's REPS Roadmap.
Real Tax Court Cases That Matter
The courts have consistently upheld that property count and location aren't what determine REPS eligibility. Documentation and genuine participation are.
In Smith v. Commissioner (T.C. Summary Opinion 2014-112), a disabled veteran qualified as a real estate professional with just one three-unit property. He had no other job, self-managed everything, and was available 24/7. The court agreed he met both the 750-hour and material participation requirements.
On the flip side, in Drocella v. Commissioner (2023), a couple who owned six rental properties while also working full-time jobs could not prove they spent more than 50% of their time on real estate, despite having written logs. The court found their records insufficient.
The takeaway? The IRS doesn't care where your properties are. They care whether you can substantiate your involvement with reliable, contemporaneous records.
Bottom Line
You can qualify for Real Estate Professional Status with out-of-state rentals. The tax code doesn't restrict it, and courts have upheld it.
But you have to be realistic about the challenges: proving material participation from a distance requires deliberate strategy, active involvement in decision-making, and meticulous time tracking.
If you're an out-of-state investor pursuing REPS, start tracking your hours now, not at tax time. REPS Time was built for exactly this: real-time logging, audit-ready reports, and a system that makes sure your documentation matches your effort.
Related Articles:
- The 7 Material Participation Tests Every Investor Should Know
- The Stay-at-Home Parent's REPS Roadmap
- The REPS Grouping Election Explained
- Can Both Spouses Qualify for REPS?
Disclaimer: This article is for informational purposes only and does not constitute tax, legal, or accounting advice. Consult a qualified CPA or tax advisor about your specific situation.
