Do Realtor Hours Count for Real Estate Professional Status?
Yes. Real estate brokerage is one of the activities the tax code expressly treats as a real property trade or business. That means a realtor's hours generally count toward real estate professional status (REPS).
The question agents ask next is usually whether the 5% ownership rule disqualifies them, since they don't own the brokerage they work under. For most 1099 agents, it doesn't. Here's how real estate professional status works for realtors.
What Are the Real Estate Professional Status Requirements?
Under §469(c)(7)(B), you must meet two tests each year:
- The 750-hour test. You perform more than 750 hours of services in real property trades or businesses in which you materially participate.
- The more-than-half test. More than half of all the personal services you perform in any trade or business are in those real property businesses.
If you file jointly, one spouse must meet both tests on their own. Spouses can't combine hours.
Does Real Estate Brokerage Count as a Real Property Trade or Business?
Yes. Section 469(c)(7)(C) lists brokerage alongside development, construction, acquisition, rental, management, and leasing. The time an agent spends listing, showing, negotiating, and closing property transactions counts toward both tests.
Mortgage brokering is different. The IRS concluded in CCA 201504010 that brokering loans isn't real property brokerage.
What Is the 5% Ownership Rule?
Hours you work as an employee don't count toward REPS unless you own more than 5% of your employer at any time during the year (§469(c)(7)(D)(ii); Reg. §1.469-9(c)(5)). The rule keeps W-2 employees of real estate companies from qualifying just by holding a job in the industry.
Why the 5% Rule Doesn't Apply to Most 1099 Realtors
Most agents aren't employees of their brokerage. A 1099 agent is self-employed: their brokerage work is their own business, reported on Schedule C, and they own 100% of it. There's no employer whose ownership needs to be tested.
Section 3508 makes this explicit. It treats licensed real estate agents as statutory nonemployees for all federal tax purposes when two conditions are met:
- Substantially all of their pay is tied to sales or other output rather than hours worked.
- They work under a written contract stating they won't be treated as an employee for federal tax purposes.
Most agent-brokerage agreements are written to meet both conditions. Working under a broker's license doesn't make you the broker's employee.
When Does the 5% Rule Apply to Realtors?
The rule can come into play in a few situations:
- Salaried or W-2 agents, such as some team members, builder sales reps, and in-house leasing agents. Their hours count only if they own more than 5% of the employer.
- Agents with equity in their brokerage who are paid through payroll. They need more than 5% ownership at some point during the year.
- Agents who operate through their own S corporation. They're technically W-2 employees, but they own 100% of the employer, so their hours count.
- Agents who don't meet §3508, for example because there's no written contract or their pay isn't commission-based. They fall back to the common-law employee test and could be treated as the brokerage's employee.
One Important Limit: Your Rental Properties
Qualifying for REPS doesn't automatically make your rental losses deductible against other income. You must also materially participate in the rentals themselves, and brokerage hours don't count toward that. Most agents with more than one property will want to make the Reg. §1.469-9(g) election to treat all their rentals as a single activity.
Frequently Asked Questions
Do I need to own my brokerage to qualify for real estate professional status?
No. If you're a 1099 independent contractor, your hours count without any ownership in the brokerage.
Can a part-time realtor qualify for REPS?
Possibly. Real estate still has to be more than half of your total working time, and you need more than 750 hours. A full-time job outside real estate usually makes the more-than-half test impossible to meet.
What records should realtors keep?
Keep contemporaneous records of your hours, such as calendars, showing logs, and transaction files. The Tax Court routinely rejects hour estimates reconstructed after the fact.
The Bottom Line
For most 1099 realtors, brokerage hours count toward real estate professional status, and the 5% ownership rule isn't an obstacle. The harder parts are usually proving your hours, clearing the more-than-half test, and materially participating in your rentals so the losses actually become deductible.
A Realtor With Rental Properties? Make Sure Your Hours Actually Count
At Shahbaz & Associates CPAs, we help real estate agents and investors qualify for and defend real estate professional status, from reviewing agent agreements and 1099 status under §3508, to building contemporaneous hour logs, making the Reg. §1.469-9(g) aggregation election, and planning around rental losses.
Contact Shahbaz & Associates CPAs before you file to make sure your hours, documentation, and rental elections are handled correctly from the start.