Your rentals are in Phoenix. You live in Chicago. Every time tax season rolls around, you wonder whether that geographic gap quietly disqualifies you from Real Estate Professional Status (REPS). It does not. But the distance does create a logging problem that trips up a surprising number of otherwise well-prepared investors.
TL;DR: Under IRC §469(c)(7), REPS qualification has nothing to do with where your properties are located. Remote management activities count toward the 750-hour test. The challenge is proving them. A contemporaneous log with the date, property, and specific task is your best defense.
Written by the REPS Time team, real estate investors who track Real Estate Professional Status and short-term rental material-participation hours, grounded in IRC §469(c)(7) and current Treasury guidance.
Does Physical Distance Disqualify You from REPS?
No. IRC §469(c)(7) does not contain a geographic proximity requirement. What the statute cares about is this: more than 750 hours of personal services in real property trades or businesses in which you materially participate, and more than half of all your personal services for the year must be in those real property trades or businesses. The statute says nothing about how many miles separate you from your units.
The challenge is practical, not legal. When your properties are local, your hours are obvious: you drove there, you were there, you left. An out-of-state investor working by phone, email, and property management software has to be more deliberate about documenting what they're actually doing and when.
Which Remote Activities Count Toward the 750-Hour Test?
This is where most out-of-state investors get confused. The good news: a wide range of remote activities qualifies. The catch: investor-level activities do not.
Under Treas. Reg. §1.469-5T(f)(2)(ii), time spent as an investor reviewing financial statements, studying market reports, or monitoring performance without being involved in day-to-day operations does not count. That reading-your-quarterly-report time is off the table.
Here is what does count, even from a thousand miles away:
Qualifying remote activities:
- Coordinating and approving repairs or maintenance (calls, texts, emails with contractors)
- Vetting and screening tenants (reviewing applications, calling references, approving or denying)
- Negotiating and reviewing lease agreements
- Handling lease renewals, rent adjustments, and non-renewal notices
- Managing delinquencies (writing notices, communicating with tenants about late rent)
- Oversight of a property manager (reviewing their reports, giving instructions, approving expenditures)
- Bookkeeping and rent reconciliation specific to your rental activity
- Insurance claim management, coordinating adjusters, and follow-up
- Researching contractors or vendors for a specific property need
- Preparing or reviewing your properties for listing, including ad copy and pricing research
The common thread: these are operational decisions, not passive monitoring. You are managing the business, not just watching it.
For a full breakdown of what the IRS excludes from the hour count, see our post on activities that don't count toward REPS hours.
How to Build a Log That Holds Up From a Distance
Here is the honest problem with out-of-state investing: the IRS auditor has no way to verify you were at the property. That means your log has to do more heavy lifting than it would for a local investor.
Tax Court cases are instructive. In Almquist v. Commissioner, the court rejected after-the-fact estimates described as "ballpark guesstimates." In Penley v. Commissioner, rounded hour totals with no task descriptions were thrown out. The pattern is clear. A log that says "property management, 3 hours, Property A" is better than nothing. A log that says "called HVAC contractor Martinez to schedule unit 3B furnace repair, reviewed two bids, approved lower bid, texted tenant about access window" is what actually survives.
For out-of-state properties, your log entries should include:
- Date of the activity
- Which property (address or a consistent nickname)
- Specific task performed, with enough detail that a stranger could understand what you did
- Time spent on that task
You do not need to record start and end clock times to satisfy the requirement, though some investors find that adding rough time brackets helps them reconstruct credible totals if ever questioned. What matters most is that the log is specific and contemporaneous, meaning you created it at or close to the time the activity happened.
Phone records, email threads, text messages, and contractor invoices are excellent corroborating evidence. You are not expected to manufacture proof, but when your digital trail naturally shows a 45-minute phone call to a contractor on a Tuesday afternoon, and your log shows 45 minutes of contractor coordination on that same Tuesday for that same property, the two pieces reinforce each other. That kind of corroboration is particularly valuable when the IRS cannot walk a field agent to your front door.
For a broader guide on building an airtight system, the real estate time tracking guide covers the mechanics in detail.
The Grouping Election: Why Out-of-State Investors Need It
If you have multiple properties scattered across different states, each one is technically a separate rental activity under the passive activity rules. Without a grouping election, you would have to prove material participation in each property individually, which can make hitting 500 hours for each one nearly impossible.
IRC §469(c)(7)(A) lets qualifying real estate professionals group all of their rental activities into a single activity for purposes of the material participation test. Once you make the grouping election, your hours across all properties are pooled. Your 80 hours managing the Phoenix duplex, your 60 hours on the Dallas fourplex, and your 40 hours on the Raleigh single-family all flow into one bucket.
The election is made on your tax return and is generally binding going forward. If you missed making it in a prior year, Rev. Proc. 2011-34 provides a late-filing procedure under certain conditions. Our post on the late REPS grouping election walks through how that relief works.
One important note: making the grouping election does not lower the 750-hour bar. It just means you clear that bar across your entire portfolio rather than property by property. You still need 750 hours total, and more than half of your personal services for the year must be in real property trades or businesses.
Does Travel Time Count?
This question comes up constantly for out-of-state investors, and the answer is nuanced. The IRS has not issued a bright-line rule on travel time for REPS purposes. The conservative position, and the one most tax professionals recommend, is that direct travel to and from a specific property for a management purpose can be counted, but windshield time on a road trip where you happen to be thinking about your rentals does not.
A quarterly site visit to your Phoenix properties where you spend two hours flying and two hours on the ground inspecting units, meeting the property manager, and documenting conditions is a reasonable place to log travel time associated with that trip. A four-hour flight where you read emails and review financials on your laptop is harder to defend as management activity.
The deeper analysis, including how courts have treated commuting and transit hours, is covered in our post on whether travel time counts for REPS.
A Worked Example: The Out-of-State Investor's Math
Here is a concrete scenario so the numbers feel real.
Assumptions:
- Investor lives in Chicago, owns four rental properties in Phoenix and Dallas
- Combined W-2 income: $280,000
- Paper losses from depreciation and expenses across the four properties: $55,000
- Marginal federal tax rate: 35%
- Hours logged for the year: 810
Without REPS: The $55,000 in rental losses is passive under IRC §469. It cannot offset W-2 income. It carries forward indefinitely until the investor has passive income or disposes of the properties.
With REPS: The investor qualifies under IRC §469(c)(7). The grouping election under IRC §469(c)(7)(A) pools all four properties. Material participation is met through the 500-hour test (Treas. Reg. §1.469-5T(a)(1)) since all 810 hours are in the grouped activity. All $55,000 in losses become non-passive and fully deductible against W-2 income.
Tax impact: $55,000 × 35% = $19,250 in federal tax savings for the year.
That is not a theoretical number. That is money that would have sat frozen as a passive loss carryforward, now returned in the form of a lower tax bill. For an out-of-state investor doing the work remotely, the only thing standing between them and that result is a well-documented log.
Practical Logging Systems That Work From a Distance
A few approaches that out-of-state investors actually use:
Option 1: A dedicated notes app or spreadsheet. Log each activity same-day in a shared document. Simple, free, and sufficient if you're disciplined. The weakness is it takes manual effort every single time.
Option 2: Email and text archiving. Some investors route all contractor and property manager communications through a single email address and treat that inbox as a partial time record. This works as supporting evidence but is not a complete log on its own.
Option 3: A purpose-built tracking app. REPS Time is built specifically for this, logging hours by property and task category in a format that mirrors what the IRS expects to see. It keeps a contemporaneous record that is exportable if you ever need to show your work.
Whatever system you choose, the non-negotiable is that it is contemporaneous. After-the-fact reconstruction is where REPS claims die. The Tax Court has been consistent about this.
For investors who want to know how their current setup compares to audit expectations, the complete guide to Real Estate Professional Status is a useful starting point.
Key Takeaways for Out-of-State REPS Investors
- Physical distance from your properties does not disqualify you from REPS under IRC §469(c)(7).
- Remote management activities, including contractor coordination, tenant screening, lease review, and bookkeeping, count toward the 750-hour test.
- Investor-level activities (reviewing statements, market research without operational follow-through) do not count under Treas. Reg. §1.469-5T(f)(2)(ii).
- The grouping election under IRC §469(c)(7)(A) pools hours across all properties, which is essential for multi-state portfolios.
- Logs must be contemporaneous, specific to each property, and tied to real management tasks.
- Supporting evidence (emails, invoices, phone records) is not required but significantly strengthens your position.
Frequently Asked Questions
Can I count hours I spend managing an out-of-state property manager? Yes. Supervising a property manager counts as management activity, provided you are giving operational instructions, reviewing their work, approving expenditures, or making decisions. Time spent simply reading their monthly reports without taking any action sits closer to the investor-activity line and is harder to defend.
What if my property manager handles almost everything? Can I still reach 750 hours? It is harder, but not impossible. The more a property manager handles, the fewer qualifying hours you have. Many investors who use full-service property managers find that they genuinely cannot hit 750 hours, which is an honest answer to a real question. Others supplement with acquisition activity, lease negotiations, capital improvement oversight, and other qualifying tasks across a larger portfolio. Audit the actual hours first before assuming REPS is within reach.
Do I need to track hours differently for each state where I own properties? No. The 750-hour test and material participation tests operate at the federal level under IRC §469. State tax treatment varies and some states do not conform to the federal passive activity rules, so check with a CPA on your specific states. But for federal REPS qualification, hours across all states count together.
What happens if the IRS audits my out-of-state REPS claim? The IRS will ask for your contemporaneous log and may cross-reference it with supporting documents like email threads, contractor invoices, and phone records. Out-of-state investors face a higher bar of credibility because they cannot point to physical presence. Courts in cases like Almquist and Penley have rejected vague, reconstructed logs. Specific, timely logs with corroborating evidence are the defense.
Can my spouse's hours help with the 750-hour test? No. Both REPS tests (750 hours and the more-than-half personal services test) must be met by a single spouse. However, once one spouse qualifies for REPS, both spouses can combine hours for purposes of the material participation test on the grouped rental activity under IRC §469(h)(5). See our post on whether both spouses can qualify for REPS for the full picture.
The Bottom Line
If your properties are in Phoenix and you're in Chicago, REPS is still on the table. The statute does not care about geography. What it cares about is 750 genuine hours of real property management and a log that can prove it. The out-of-state investor's job is to be more deliberate, not more physically present. Log specifically. Log consistently. Use your email trail and contractor records as backup. And make the grouping election so all your cross-state hours flow into one count.
Do that, and the distance is a logistical detail, not a disqualifier.
Sources
- IRC §469(c)(7) — Real estate professional exception to passive activity rules
- Treas. Reg. §1.469-5T — Seven material participation tests
- Treas. Reg. §1.469-9 — Rules for real estate professionals
- Rev. Proc. 2011-34 — Late grouping election relief
- IRS Publication 925 — Passive Activity and At-Risk Rules
This article is for educational purposes only and is not tax or legal advice. Consult a qualified CPA familiar with real estate. Agents Invest LLC is not a CPA firm, law firm, or registered tax preparer.
