{"id":1491,"date":"2024-07-01T10:15:30","date_gmt":"2024-07-01T10:15:30","guid":{"rendered":"https:\/\/wcginc.com\/?p=1491"},"modified":"2026-01-26T16:36:31","modified_gmt":"2026-01-26T16:36:31","slug":"real-estate-professional-defined","status":"publish","type":"post","link":"https:\/\/wcginc.com\/blog\/real-estate-professional-defined\/","title":{"rendered":"Real Estate Professional Defined"},"content":{"rendered":"<div class=\"wpb-content-wrapper\"><p>[vc_row el_class=&#8221;pg-inr-wrp&#8221; woodmart_css_id=&#8221;6729132a68f6b&#8221; responsive_spacing=&#8221;eyJwYXJhbV90eXBlIjoid29vZG1hcnRfcmVzcG9uc2l2ZV9zcGFjaW5nIiwic2VsZWN0b3JfaWQiOiI2NzI5MTMyYTY4ZjZiIiwic2hvcnRjb2RlIjoidmNfcm93IiwiZGF0YSI6eyJ0YWJsZXQiOnt9LCJtb2JpbGUiOnt9fX0=&#8221; mobile_bg_img_hidden=&#8221;no&#8221; tablet_bg_img_hidden=&#8221;no&#8221; woodmart_parallax=&#8221;0&#8243; woodmart_gradient_switch=&#8221;no&#8221; woodmart_box_shadow=&#8221;no&#8221; wd_z_index=&#8221;no&#8221; woodmart_disable_overflow=&#8221;0&#8243; row_reverse_mobile=&#8221;0&#8243; row_reverse_tablet=&#8221;0&#8243;][vc_column]\t\t\t<div class=\"info-box-wrapper\">\n\t\t\t\t<div id=\"wd-68b559d20300a\" class=\" wd-rs-68b559d20300a wd-info-box wd-wpb text-left box-icon-align-top box-style- color-scheme- wd-bg-none border-btm-title \">\n\t\t\t\t\t\t\t\t\t\t<div class=\"info-box-content\">\n\t\t\t\t\t\t\t\t\t\t\t\t<div class=\"info-box-inner reset-last-child\"><\/p>\n<div class=\"overview\">\n<h2><span class=\"ez-toc-section\" id=\"Key_Takeaways\"><\/span>Key Takeaways<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<ul>\n<li>Rental losses are often limited by passive activity rules, which cap deductions for non-passive income.<\/li>\n<li>Passive loss limits for married taxpayers are $25,000, phasing out as income rises; single filers face $12,500.<\/li>\n<li>Losses above the passive limit can be carried forward to future years or offset upon property sale.<\/li>\n<li>Designating yourself as a Real Estate Professional (REP) removes passive loss limits and allows full deduction of rental losses.<\/li>\n<li>REP status also exempts rental income from the 3.8% Net Investment Income Tax (NIIT) for high earners.<\/li>\n<li>To qualify as a REP, you must:\n<ul>\n<li>Spend more than 50% of your work time in real estate activities.<\/li>\n<li>Work at least 750 hours annually in these activities.<\/li>\n<li>Materially participate in each rental property (or elect to treat multiple properties as a single activity).<\/li>\n<\/ul>\n<\/li>\n<li>Hours must be documented contemporaneously; on-call or retroactively estimated hours don\u2019t count.<\/li>\n<li>Material participation requires active involvement in rental operations, such as tenant approval, repairs, and management decisions.<\/li>\n<li>REP designation rules are applied annually and only one spouse needs to meet the criteria on a joint return.<\/li>\n<\/ul>\n<\/div>\n<p>\n<\/div>\n\n\t\t\t\t\t\t\t\t\t\t\t<\/div>\n\n\t\t\t\t\t\n\t\t\t\t\t\t\t\t\t<\/div>\n\t\t\t<\/div>\n\t\t\t\t\t<div class=\"info-box-wrapper\">\n\t\t\t\t<div id=\"wd-681e8ac1c0298\" class=\" wd-rs-681e8ac1c0298 wd-info-box wd-wpb text-left box-icon-align-top box-style- color-scheme- wd-bg-none border-btm-title img-right \">\n\t\t\t\t\t\t\t\t\t\t<div class=\"info-box-content\">\n\t\t\t\t\t\t\t\t\t\t\t\t<div class=\"info-box-inner reset-last-child\"><p><img decoding=\"async\" class=\"alignnone size-full wp-image-25986\" src=\"https:\/\/wcginc.com\/wp-content\/uploads\/014887_1885800790_real_estate_professional_300a.webp\" alt=\"\" width=\"300\" height=\"188\" \/>Why designate myself as a real estate professional? Aside from being something cool to tell the grand kids, let\u2019s presume that you have a rental loss. It is common to have a tax loss on your rental although it cash flows, and the primary reason is depreciation. How does it affect your tax return?<\/p>\n<p><a href=\"https:\/\/www.law.cornell.edu\/uscode\/text\/26\/469\" target=\"_blank\" rel=\"noopener\">Section 469<\/a> defines a passive activity as any activity that involves a trade or business in which an individual taxpayer does not materially participate. Rental income is typically considered passive, meaning that you are not directly earning the income as you would with a W-2 job or as a small business owner. Passive losses may be deducted from passive income, and from non-passive income such as wages and business income but there are limits (of course there are!). Passive loss limits for married taxpayers max out at $25,000, and that number decreases as your gross income increases.<\/p>\n<p>Specifically, passive loss reduces $1 for every $2 over $100,000 adjusted gross income (AGI) and by $150,000 (for married couples) the passive loss deduction is $0. Bummer. Not all is lost however. If your rental losses are capped or disallowed because of passive loss limits, the portion exceeding the passive loss limit is carried forward on <a href=\"https:\/\/www.irs.gov\/pub\/irs-pdf\/f8582.pdf\" target=\"_blank\" rel=\"noopener\">Form 8582<\/a>, aggregated for each year and may be deducted in the year of disposal (sale). They may also offset future net rental income\u2026 you had losses, they were carried forward, you now have rental profits and the suspended losses can be used to offset.<\/p>\n<p>Passive loss limits for single filers or for married persons who live apart for the entire tax year is $12,500. If you live with your spouse for any part of the year yet file a married, filing separate tax return the passive loss limit is $0. Not good.<\/p>\n<p>There is another angle to all this, and this is the gist of this article- if you are a real estate professional as defined by the IRS, you can deduct 100% of your rental property losses and you are not capped by passive loss limits. This makes sense since your rental income is no longer passive if it is your livelihood or at least a large portion of your livelihood. In other words, the real estate professional (REP) status is essentially telling the IRS and the world that your rental activities are not something you tend to from time to time but rather are approached with the mindset of a busy business owner.<\/p>\n<p>But wait! There\u2019s more. As mentioned later in this post, when the <a href=\"https:\/\/www.irs.gov\/newsroom\/questions-and-answers-on-the-net-investment-income-tax\" target=\"_blank\" rel=\"noopener\">Net Investment Income Tax (NIIT)<\/a> which was introduced along with the Affordable Care Act, the real estate professional designation became an important tax planning tool all over again. Huh? If your modified adjusted gross income (MAGI) hits a certain amount, the NIIT is charged on all portfolio (interest, dividends, capital gains) and passive activity income (rentals). However, if you are a real estate professional your taxable rental income (profits) is no longer deemed passive and as such is not being taxed by the net investment income tax of 3.8%. That could be huge!<\/p>\n<p>So, how do you become a real estate professional? It is not enough to simply own rentals or have a real estate license. There is a two part test\u2026 hours spent and material participation-<\/p>\n<ol>\n<li>Spend 750 hours on real estate activities (more than other activities such as your day job), <em><strong>and<\/strong><\/em><\/li>\n<li>Materially participate as defined by <a href=\"https:\/\/www.law.cornell.edu\/cfr\/text\/26\/1.469-5T\" target=\"_blank\" rel=\"noopener\">Section 469-5T<\/a><\/li>\n<\/ol>\n<p>Let\u2019s do this!<\/p>\n<\/div>\n\n\t\t\t\t\t\t\t\t\t\t\t<\/div>\n\n\t\t\t\t\t\n\t\t\t\t\t<style><\/style>\t\t\t\t<\/div>\n\t\t\t<\/div>\n\t\t\t\t\t<div class=\"info-box-wrapper\">\n\t\t\t\t<div id=\"wd-681e8ae6b5f91\" class=\" wd-rs-681e8ae6b5f91 wd-info-box wd-wpb text-left box-icon-align-top box-style- color-scheme- wd-bg-none border-btm-title \">\n\t\t\t\t\t\t\t\t\t\t<div class=\"info-box-content\">\n\t\t\t\t\t\t<h2 class=\"info-box-title title wd-font-weight-800 box-title-style-default font-primary wd-fontsize-m\"><span class=\"ez-toc-section\" id=\"Real_Estate_Professional_Definition\"><\/span>Real Estate Professional Definition<span class=\"ez-toc-section-end\"><\/span><\/h2>\t\t\t\t\t\t<div class=\"info-box-inner reset-last-child\"><p>To be a real estate professional according to <a href=\"https:\/\/www.irs.gov\/publications\/p925\" target=\"_blank\" rel=\"noopener\">IRS Publication 925 (Passive Activity and At-Risk Rules)<\/a>, an individual must spend the majority of his or her time in real property businesses which include development or redevelopment, construction or reconstruction, acquisition or conversion, rental, management or operation, leasing and \/ or brokerage.<\/p>\n<p>In addition, more than half of the personal services performed in all businesses and activities during the year must be performed in real estate activities. Read this again! If you have another full-time job in which you work 40 hours a week, you will need to work more than 40 hours per week in your real estate business. That can truly be a hard sell to the IRS. Said another way, that is 6 hours per day, every day, spent on your rentals (should you have a regular 40-hour a week job).<\/p>\n<p>Second, your hours worked in the real estate activity must be more than 750 hours. Any work performed as an investor cannot be counted (we\u2019ll get to that in a minute). Here is the play by play directly from <a href=\"https:\/\/www.law.cornell.edu\/uscode\/text\/26\/469\" target=\"_blank\" rel=\"noopener\">Section 469(c)(7) of the Internal Revenue Code<\/a> and repeated in IRS Publication 925-<\/p>\n<ol>\n<li>More than half of the personal services you performed in all trades or businesses during the tax year were performed in real property trades or businesses in which you materially participated.<\/li>\n<li>You performed more than 750 hours of services during the tax year in real property trades or businesses in which you materially participated<\/li>\n<\/ol>\n<p>The words material participation are mentioned twice. Is that important? Yes, and we\u2019ll get to that as well.<\/p>\n<p>One spouse alone must meet both tests (more than 50% and 750 hours). This is different than the material participation tests where the hours spent by a spouse do count. <em><strong>Also, services performed as an employee do not count unless the employee is at least a 5% owner.<\/strong><\/em> This is a massive conundrum- for example, if you are a real estate broker or if you are fix and flipper, and you run those activities through your S Corp, then the hours spent working for the corporation count towards the 750. What\u2019s the big deal? Your S corporation will issue you a W-2, and as you will learn below from the <a href=\"https:\/\/wcginc.com\/wp-content\/documents\/ATG-PAL.pdf\" target=\"_blank\" rel=\"noopener\">Audit Techniques Guide<\/a> (ATG), having a W-2 could be trigger for an IRS challenge.<\/p>\n<p>If you own multiple rental properties, each will be considered a separate entity and you must satisfy the material participation requirements on each property independently unless an election is made to treat all those interests as a single activity. This election is simply a statement that is attached to your tax return. Under <a href=\"https:\/\/www.irs.gov\/pub\/irs-drop\/rp-10-13.pdf\" target=\"_blank\" rel=\"noopener\">Revenue Procedure 2010-13<\/a>, you can make the election retroactively (typically requires amending a tax return just for the election).<\/p>\n<p>These tests are applied annually. So, a rental property owner may qualify as a real estate professional in some years but not in others. If your spouse qualifies as a real estate professional (for example, a licensed realtor) but you do all the work for the rentals, that satisfies the test (assuming a married, filing joint tax return is filed).<\/p>\n<p>Wait! There\u2019s more.<\/p>\n<p>Once you qualify as a real estate professional, you must materially participate in the operation of your business (rental properties). This is where it gets tricky. Keep reading!<\/p>\n<\/div>\n\n\t\t\t\t\t\t\t\t\t\t\t<\/div>\n\n\t\t\t\t\t\n\t\t\t\t\t<style><\/style>\t\t\t\t<\/div>\n\t\t\t<\/div>\n\t\t\t\t\t<div class=\"info-box-wrapper\">\n\t\t\t\t<div id=\"wd-67303c5bc8e33\" class=\" wd-rs-67303c5bc8e33 wd-info-box wd-wpb text-left box-icon-align-top box-style- color-scheme- wd-bg-none border-btm-title img-right \">\n\t\t\t\t\t\t\t\t\t\t<div class=\"info-box-content\">\n\t\t\t\t\t\t<h2 class=\"info-box-title title wd-font-weight-800 box-title-style-default font-primary wd-fontsize-m\"><span class=\"ez-toc-section\" id=\"Real_Estate_Professional_Hours\"><\/span>Real Estate Professional Hours<span class=\"ez-toc-section-end\"><\/span><\/h2>\t\t\t\t\t\t<div class=\"info-box-inner reset-last-child\"><p>Taxpayers are required under <a href=\"https:\/\/www.law.cornell.edu\/cfr\/text\/26\/1.469-5\" target=\"_blank\" rel=\"noopener\">Internal Revenue Code Section 1.469-5T(f)(4)<\/a> to provide proof of services performed and the hours attributable to those services. Here is a snippet regarding proof for material participation, and the same process can be used for substantiating real estate professional hours-<\/p>\n<p>The extent of an individual\u2019s participation in an activity may be established by any reasonable means. Contemporaneous daily time reports, logs, or similar documents are not required if the extent of such participation may be established by other reasonable means. Reasonable means for purposes of this paragraph may include but are not limited to the identification of services performed over a period of time and the approximate number of hours spent performing such services during such period, based on appointment books, calendars, or narrative summaries.<\/p>\n<p><img decoding=\"async\" class=\"alignnone size-full wp-image-26039\" src=\"https:\/\/wcginc.com\/wp-content\/uploads\/blog2-2.webp\" alt=\"\" width=\"300\" height=\"200\" \/>Second, logs cannot be retro-created. So, you must have been maintaining your logs as you performed the real estate activities. During an audit or examination if you mention things like \u201cI jotted activities down on my log and then went back and tallied the hours in preparation for this audit\u201d you will probably lose. You need to have maintained the written account of your hours from the beginning. Here is the case law reference- The regulations do not allow a postevent \u201cballpark guesstimate\u201d in <a href=\"https:\/\/wcginc.com\/wp-content\/documents\/ATG-PAL.pdf\" target=\"_blank\" rel=\"noopener\">Moss v. Commissioner, 135 T.C. 365, 369 (2010)<\/a>.<\/p>\n<p>Third, on-call hours do not count, you must \u201cperform\u201d an activity. The tax court has ruled that waiting for the phone to ring in case a maintenance or emergency call comes in does not count. Here\u2019s the snippet from <a href=\"https:\/\/wcginc.com\/wp-content\/uploads\/2024\/10\/TCSummary2012-20Kutney.pdf\" target=\"_blank\" rel=\"noopener\">Kutney v. Commissioner, Tax Court Summary 2012-20<\/a> under footnote 7-<\/p>\n<p>Petitioners also contend that Mr. Kutney\u2019s ownership and management of the rental properties was a \u201ctruly full day activity\u201d that required him to be available all day every day and that these on-call hours should count towards the 750-hour requirement. We disagree with this contention. Sec. 469(c)(7) applies where the taxpayer \u201cperforms more than 750 hours of services\u201d rather than where the taxpayer is merely on call to perform services. Sec. 469(c)(7)(B)(ii); see also Moss v. Commissioner, 135 T.C. 365, 370 (2010); sec. 1.469-9(b)(4), Income Tax Regs.<\/p>\n<p>Ok\u2026 that is hours and which ones count, etc. Let\u2019s move on to material participation.<\/p>\n<\/div>\n\n\t\t\t\t\t\t\t\t\t\t\t<\/div>\n\n\t\t\t\t\t\n\t\t\t\t\t<style><\/style>\t\t\t\t<\/div>\n\t\t\t<\/div>\n\t\t[vc_row_inner content_placement=&#8221;middle&#8221; el_class=&#8221;client-review-secs box&#8211;card&#8221; woodmart_css_id=&#8221;672e712482714&#8243; responsive_spacing=&#8221;eyJwYXJhbV90eXBlIjoid29vZG1hcnRfcmVzcG9uc2l2ZV9zcGFjaW5nIiwic2VsZWN0b3JfaWQiOiI2NzJlNzEyNDgyNzE0Iiwic2hvcnRjb2RlIjoidmNfcm93X2lubmVyIiwiZGF0YSI6eyJ0YWJsZXQiOnt9LCJtb2JpbGUiOnt9fX0=&#8221; mobile_bg_img_hidden=&#8221;no&#8221; tablet_bg_img_hidden=&#8221;no&#8221; woodmart_parallax=&#8221;0&#8243; woodmart_gradient_switch=&#8221;no&#8221; woodmart_box_shadow=&#8221;no&#8221; wd_z_index=&#8221;no&#8221; woodmart_disable_overflow=&#8221;0&#8243; row_reverse_mobile=&#8221;0&#8243; row_reverse_tablet=&#8221;0&#8243;][vc_column_inner width=&#8221;1\/3&#8243; woodmart_css_id=&#8221;671780b35b49a&#8221; parallax_scroll=&#8221;no&#8221; woodmart_sticky_column=&#8221;false&#8221; wd_collapsible_content_switcher=&#8221;no&#8221; wd_column_role_offcanvas_desktop=&#8221;no&#8221; wd_column_role_offcanvas_tablet=&#8221;no&#8221; wd_column_role_offcanvas_mobile=&#8221;no&#8221; wd_column_role_content_desktop=&#8221;no&#8221; wd_column_role_content_tablet=&#8221;no&#8221; wd_column_role_content_mobile=&#8221;no&#8221; mobile_bg_img_hidden=&#8221;no&#8221; tablet_bg_img_hidden=&#8221;no&#8221; woodmart_parallax=&#8221;0&#8243; woodmart_box_shadow=&#8221;no&#8221; responsive_spacing=&#8221;eyJwYXJhbV90eXBlIjoid29vZG1hcnRfcmVzcG9uc2l2ZV9zcGFjaW5nIiwic2VsZWN0b3JfaWQiOiI2NzE3ODBiMzViNDlhIiwic2hvcnRjb2RlIjoidmNfY29sdW1uX2lubmVyIiwiZGF0YSI6eyJ0YWJsZXQiOnt9LCJtb2JpbGUiOnt9fX0=&#8221; wd_z_index=&#8221;no&#8221;]\t\t<div id=\"wd-681e8b7ba3d01\" class=\"wd-image wd-wpb wd-rs-681e8b7ba3d01 text-left \">\n\t\t\t\n\t\t\t<img decoding=\"async\" width=\"230\" height=\"230\" src=\"https:\/\/wcginc.com\/wp-content\/uploads\/repslog.webp\" class=\"attachment-full size-full\" alt=\"Colorado CPA Firm\" srcset=\"https:\/\/wcginc.com\/wp-content\/uploads\/repslog.webp 230w, https:\/\/wcginc.com\/wp-content\/uploads\/repslog-150x150.webp 150w\" sizes=\"(max-width: 230px) 100vw, 230px\" \/>\n\t\t\t\t\t<\/div>\n\t\t[\/vc_column_inner][vc_column_inner width=&#8221;2\/3&#8243; woodmart_css_id=&#8221;671780c0415fb&#8221; parallax_scroll=&#8221;no&#8221; woodmart_sticky_column=&#8221;false&#8221; wd_collapsible_content_switcher=&#8221;no&#8221; wd_column_role_offcanvas_desktop=&#8221;no&#8221; wd_column_role_offcanvas_tablet=&#8221;no&#8221; wd_column_role_offcanvas_mobile=&#8221;no&#8221; wd_column_role_content_desktop=&#8221;no&#8221; wd_column_role_content_tablet=&#8221;no&#8221; wd_column_role_content_mobile=&#8221;no&#8221; mobile_bg_img_hidden=&#8221;no&#8221; tablet_bg_img_hidden=&#8221;no&#8221; woodmart_parallax=&#8221;0&#8243; woodmart_box_shadow=&#8221;no&#8221; responsive_spacing=&#8221;eyJwYXJhbV90eXBlIjoid29vZG1hcnRfcmVzcG9uc2l2ZV9zcGFjaW5nIiwic2VsZWN0b3JfaWQiOiI2NzE3ODBjMDQxNWZiIiwic2hvcnRjb2RlIjoidmNfY29sdW1uX2lubmVyIiwiZGF0YSI6eyJ0YWJsZXQiOnt9LCJtb2JpbGUiOnt9fX0=&#8221; wd_z_index=&#8221;no&#8221;]\t\t\t<div class=\"info-box-wrapper\">\n\t\t\t\t<div id=\"wd-681e8b48cb513\" class=\" wd-rs-681e8b48cb513 wd-info-box wd-wpb text-left box-icon-align-top box-style- color-scheme- wd-bg-none with-btn box-btn-static \">\n\t\t\t\t\t\t\t\t\t\t<div class=\"info-box-content\">\n\t\t\t\t\t\t<h3 class=\"info-box-title title wd-font-weight-800 box-title-style-default font-primary wd-fontsize-m\"><span class=\"ez-toc-section\" id=\"REPSlog_App\"><\/span>REPSlog App<span class=\"ez-toc-section-end\"><\/span><\/h3>\t\t\t\t\t\t<div class=\"info-box-inner reset-last-child\"><p>Download and install REPSlog app now!<\/p>\n<\/div>\n\n\t\t\t\t\t\t<div class=\"info-btn-wrapper\"><div id=\"wd-6a31955db5c2d\" class=\"  wd-button-wrapper text-left\"><a href=\"https:\/\/repslog.onelink.me\/fX3Z\/wcg\" title=\"\" target=\"_blank\" class=\"btn btn-style-default btn-shape-rectangle btn-size-default\">Learn More<\/a><\/div><\/div>\t\t\t\t\t<\/div>\n\n\t\t\t\t\t\n\t\t\t\t\t<style><\/style>\t\t\t\t<\/div>\n\t\t\t<\/div>\n\t\t[\/vc_column_inner][\/vc_row_inner]\t\t\t<div class=\"info-box-wrapper\">\n\t\t\t\t<div id=\"wd-67302f21b0e4a\" class=\" wd-rs-67302f21b0e4a wd-info-box wd-wpb text-left box-icon-align-top box-style- color-scheme- wd-bg-none border-btm-title \">\n\t\t\t\t\t\t\t\t\t\t<div class=\"info-box-content\">\n\t\t\t\t\t\t<h2 class=\"info-box-title title wd-font-weight-800 box-title-style-default font-primary wd-fontsize-m\"><span class=\"ez-toc-section\" id=\"Rental_Activities\"><\/span>Rental Activities<span class=\"ez-toc-section-end\"><\/span><\/h2>\t\t\t\t\t\t<div class=\"info-box-inner reset-last-child\"><p>Section 469(c)(2) states that the term \u201cpassive activity\u201d includes any rental activity, regardless of whether the taxpayer materially participates. Thus, rental real estate activities are commonly referred to as per se passive activities. Therefore, a rental property is a passive activity even if you materially participated in that activity, <em><strong>unless you materially participated as a real estate professional.<\/strong><\/em> Read that again since there is a subtle difference. Said in another way- just because you meet the material participation rules as described below, that alone does not make your rental property activity non-passive. The participation must be as a real estate professional as defined above (750 hours, more than anything else you do, and blah blah blah).<\/p>\n<p>An activity is a rental activity if tangible property (real or personal) is used by customers or held for use by customers and the gross income from the activity represents amounts paid mainly for the use of the property. It does not matter whether the use is under a lease, a service contract, or some other arrangement.<\/p>\n<p>There are several exceptions to rental activities, such as hotels. See <a href=\"https:\/\/www.irs.gov\/pub\/irs-pdf\/p925.pdf\" target=\"_blank\" rel=\"noopener\">IRS Publication 925<\/a> for more riveting information.<\/p>\n<\/div>\n\n\t\t\t\t\t\t\t\t\t\t\t<\/div>\n\n\t\t\t\t\t\n\t\t\t\t\t<style><\/style>\t\t\t\t<\/div>\n\t\t\t<\/div>\n\t\t\t\t\t<div class=\"info-box-wrapper\">\n\t\t\t\t<div id=\"wd-67303e98d6d08\" class=\" wd-rs-67303e98d6d08 wd-info-box wd-wpb text-left box-icon-align-top box-style- color-scheme- wd-bg-none border-btm-title img-right \">\n\t\t\t\t\t\t\t\t\t\t<div class=\"info-box-content\">\n\t\t\t\t\t\t<h2 class=\"info-box-title title wd-font-weight-800 box-title-style-default font-primary wd-fontsize-m\"><span class=\"ez-toc-section\" id=\"Material_Participation\"><\/span>Material Participation<span class=\"ez-toc-section-end\"><\/span><\/h2>\t\t\t\t\t\t<div class=\"info-box-inner reset-last-child\"><p><img decoding=\"async\" class=\"alignnone size-full wp-image-26040\" src=\"https:\/\/wcginc.com\/wp-content\/uploads\/blog2-4.webp\" alt=\"\" width=\"300\" height=\"200\" \/>Let\u2019s discuss active participation first. For rental properties, the issue is nearly moot since active participation relates only to rental real estate activities and is a less stringent standard than material participation. As long as a taxpayer participates in management decisions in a bona fide sense, he actively participated in the real estate rental activity. Activities include new tenant approval, rental terms, repair authorizations, capital expenditures, etc. <strong>WCG CPAs &amp; Advisors<\/strong> has a client whose brother handles all of the rental property matters for a condo in San Francisco- in this example, his participation did not reach the level of active participation. Said differently, if you forget that you own a rental, you likely do not actively participate.<\/p>\n<p>According to the <a href=\"https:\/\/wcginc.com\/wp-content\/uploads\/2024\/10\/ATG-PAL-1.pdf\" target=\"_blank\" rel=\"noopener\">IRS Audit Techniques Guide on Passive Activities<\/a> there is not a specific hour requirement. Even if you use a management company, you will be considered active if you are involved with the operation of your rental. However, the taxpayer must be exercising independent judgment and not simply ratifying decisions made by a manager or management company. In addition, the taxpayer must have at least a 10% interest in the rental activity.<\/p>\n<p>To recap for married taxpayers, passive activities such a rentals or investment partnerships have a loss limit of $25,000 in offsetting non-passive income such as W-2 wages or other earnings. This is reduced $1 for every $2 over $100,000 in adjusted gross income. Any disallowed passive loss is carried forward until you dispose of the property or investment. For example, you make $120,000 at your regular job and have $30,000 in rental losses. Your passive loss deduction is $15,000 ($25,000 minus $10,000) and the remaining $15,000 is carried forward.<\/p>\n<p>So active participation only matters for those taxpayers who are not limited on their passive losses. In other words, if you do not exceed the passive loss limits you only need to demonstrate active participation. However, and the primary purpose of this article, to avoid the passive loss limitations of $25,000, a taxpayer must be considered a real estate professional who also materially participates in the rental activity.<\/p>\n<p>Don\u2019t forget the reduction of net investment income tax by changing the color of money on your rental activities from passive to something other than passive. The rules for material participation are considerably more stringent, and will be discussed next. Fun!<\/p>\n<\/div>\n\n\t\t\t\t\t\t\t\t\t\t\t<\/div>\n\n\t\t\t\t\t\n\t\t\t\t\t<style><\/style>\t\t\t\t<\/div>\n\t\t\t<\/div>\n\t\t[vc_row_inner el_class=&#8221;boxes&#8211;pack&#8221; woodmart_css_id=&#8221;672f64599e51f&#8221; responsive_spacing=&#8221;eyJwYXJhbV90eXBlIjoid29vZG1hcnRfcmVzcG9uc2l2ZV9zcGFjaW5nIiwic2VsZWN0b3JfaWQiOiI2NzJmNjQ1OTllNTFmIiwic2hvcnRjb2RlIjoidmNfcm93X2lubmVyIiwiZGF0YSI6eyJ0YWJsZXQiOnt9LCJtb2JpbGUiOnt9fX0=&#8221; mobile_bg_img_hidden=&#8221;no&#8221; tablet_bg_img_hidden=&#8221;no&#8221; woodmart_parallax=&#8221;0&#8243; woodmart_gradient_switch=&#8221;no&#8221; woodmart_box_shadow=&#8221;no&#8221; wd_z_index=&#8221;no&#8221; woodmart_disable_overflow=&#8221;0&#8243; row_reverse_mobile=&#8221;0&#8243; row_reverse_tablet=&#8221;0&#8243;][vc_column_inner width=&#8221;1\/3&#8243;]\t\t\t<div class=\"info-box-wrapper\">\n\t\t\t\t<div id=\"wd-68984a1f0b294\" class=\" wd-rs-68984a1f0b294 wd-info-box wd-wpb text-left box-icon-align-top box-style- color-scheme- wd-bg-none \">\n\t\t\t\t\t\t\t\t\t\t\t<div class=\"box-icon-wrapper  box-with-icon box-icon-simple\">\n\t\t\t\t\t\t\t<div class=\"info-box-icon\">\n\n\t\t\t\t\t\t\t\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t<img decoding=\"async\" width=\"300\" height=\"200\" src=\"https:\/\/wcginc.com\/wp-content\/uploads\/014887_1005704854_rep_status_irs_challenge_300-1.webp\" class=\"attachment-full size-full\" alt=\"\" \/>\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\n\t\t\t\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t\t\t\t\t\t\t<div class=\"info-box-content\">\n\t\t\t\t\t\t<h4 class=\"info-box-title title box-title-style-default wd-fontsize-m\">IRS Audit Tech Guide<\/h4>\t\t\t\t\t\t<div class=\"info-box-inner reset-last-child\"><p>Learn about the Audit Technique Guide on Passive Activity Losses with key insights and guidance.<\/p>\n<\/div>\n\n\t\t\t\t\t\t\t\t\t\t\t<\/div>\n\n\t\t\t\t\t\t\t\t\t\t\t<a class=\"wd-info-box-link wd-fill\" aria-label=\"Infobox link\" href=\"\/wp-content\/documents\/ATG-PAL.pdf\" title=\"\"><\/a>\n\t\t\t\t\t\n\t\t\t\t\t\t\t\t\t<\/div>\n\t\t\t<\/div>\n\t\t[\/vc_column_inner][vc_column_inner width=&#8221;1\/3&#8243;]\t\t\t<div class=\"info-box-wrapper\">\n\t\t\t\t<div id=\"wd-689849a09edc0\" class=\" wd-rs-689849a09edc0 wd-info-box wd-wpb text-left box-icon-align-top box-style- color-scheme- wd-bg-none \">\n\t\t\t\t\t\t\t\t\t\t\t<div class=\"box-icon-wrapper  box-with-icon box-icon-simple\">\n\t\t\t\t\t\t\t<div class=\"info-box-icon\">\n\n\t\t\t\t\t\t\t\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t<img decoding=\"async\" width=\"622\" height=\"622\" src=\"https:\/\/wcginc.com\/wp-content\/uploads\/Short-Term.jpg\" class=\"attachment-full size-full\" alt=\"\" \/>\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\n\t\t\t\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t\t\t\t\t\t\t<div class=\"info-box-content\">\n\t\t\t\t\t\t<h4 class=\"info-box-title title box-title-style-default wd-fontsize-m\">Short-Term Rental Loophole<\/h4>\t\t\t\t\t\t<div class=\"info-box-inner reset-last-child\"><p>Learn how the short-term rental loophole helps real estate investors maximize tax benefits.<\/p>\n<\/div>\n\n\t\t\t\t\t\t\t\t\t\t\t<\/div>\n\n\t\t\t\t\t\t\t\t\t\t\t<a class=\"wd-info-box-link wd-fill\" aria-label=\"Infobox link\" href=\"\/blog\/short-term-rental-tax-loophole\/\" title=\"\"><\/a>\n\t\t\t\t\t\n\t\t\t\t\t\t\t\t\t<\/div>\n\t\t\t<\/div>\n\t\t[\/vc_column_inner][vc_column_inner width=&#8221;1\/3&#8243;]\t\t\t<div class=\"info-box-wrapper\">\n\t\t\t\t<div id=\"wd-68984a2d677a1\" class=\" wd-rs-68984a2d677a1 wd-info-box wd-wpb text-left box-icon-align-top box-style- color-scheme- wd-bg-none \">\n\t\t\t\t\t\t\t\t\t\t\t<div class=\"box-icon-wrapper  box-with-icon box-icon-simple\">\n\t\t\t\t\t\t\t<div class=\"info-box-icon\">\n\n\t\t\t\t\t\t\t\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t<img decoding=\"async\" width=\"300\" height=\"150\" src=\"https:\/\/wcginc.com\/wp-content\/uploads\/tax-deduction-1.webp\" class=\"attachment-full size-full\" alt=\"\" \/>\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\n\t\t\t\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t\t\t\t\t\t\t<div class=\"info-box-content\">\n\t\t\t\t\t\t<h4 class=\"info-box-title title box-title-style-default wd-fontsize-m\">Rental Tax Deductions<\/h4>\t\t\t\t\t\t<div class=\"info-box-inner reset-last-child\"><p>Real estate investment is one of WCG CPAs &amp; Advisors core competencies, and as such we get asked a bunch of questions on rental property tax deductions.<\/p>\n<\/div>\n\n\t\t\t\t\t\t\t\t\t\t\t<\/div>\n\n\t\t\t\t\t\t\t\t\t\t\t<a class=\"wd-info-box-link wd-fill\" aria-label=\"Infobox link\" href=\"\/tax-center\/rental-property-tax-deductions\/\" title=\"\"><\/a>\n\t\t\t\t\t\n\t\t\t\t\t\t\t\t\t<\/div>\n\t\t\t<\/div>\n\t\t[\/vc_column_inner][\/vc_row_inner]\t\t\t<div class=\"info-box-wrapper\">\n\t\t\t\t<div id=\"wd-68b55b035da3c\" class=\" wd-rs-68b55b035da3c wd-info-box wd-wpb text-left box-icon-align-top box-style- color-scheme- wd-bg-none border-btm-title faqs-wrap \">\n\t\t\t\t\t\t\t\t\t\t<div class=\"info-box-content\">\n\t\t\t\t\t\t<h2 class=\"info-box-title title box-title-style-default wd-fontsize-m\"><span class=\"ez-toc-section\" id=\"Frequently_Asked_Questions\"><\/span>Frequently Asked Questions<span class=\"ez-toc-section-end\"><\/span><\/h2>\t\t\t\t\t\t<div class=\"info-box-inner reset-last-child\"><\/p>\n<h3><span class=\"ez-toc-section\" id=\"What_is_a_passive_activity\"><\/span>What is a passive activity?<span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>Any trade or business where you don\u2019t materially participate; most rental income is considered passive.<\/p>\n<h3><span class=\"ez-toc-section\" id=\"What_are_passive_loss_limits\"><\/span>What are passive loss limits?<span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>Married taxpayers can deduct up to $25,000 of passive losses against non-passive income; limits decrease with higher income.<\/p>\n<h3><span class=\"ez-toc-section\" id=\"How_can_I_avoid_passive_loss_limits\"><\/span>How can I avoid passive loss limits?<span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>Qualify as a Real Estate Professional and materially participate in your rental activities.<\/p>\n<h3><span class=\"ez-toc-section\" id=\"What_is_the_750-hour_rule\"><\/span>What is the 750-hour rule?<span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>You must spend at least 750 hours per year on real estate activities to meet REP requirements.<\/p>\n<h3><span class=\"ez-toc-section\" id=\"Does_my_spouses_activity_count\"><\/span>Does my spouse\u2019s activity count?<span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>Only one spouse needs to meet the REP requirements for a joint return, but spousal hours can help for material participation.<\/p>\n<h3><span class=\"ez-toc-section\" id=\"Can_I_count_on-call_hours\"><\/span>Can I count on-call hours?<span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>No, only hours actively spent performing real estate activities count.<\/p>\n<h3><span class=\"ez-toc-section\" id=\"How_do_I_track_REP_hours\"><\/span>How do I track REP hours?<span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>Maintain contemporaneous logs, calendars, or appointment books; retroactive estimates are not accepted.<\/p>\n<h3><span class=\"ez-toc-section\" id=\"What_qualifies_as_material_participation\"><\/span>What qualifies as material participation?<span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>Involvement in daily rental operations, decisions on tenants, repairs, capital expenditures, and management activities.<\/p>\n<h3><span class=\"ez-toc-section\" id=\"How_does_REP_status_affect_taxes\"><\/span>How does REP status affect taxes?<span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>It removes passive loss limits and exempts rental income from the 3.8% NIIT for qualifying high earners.<\/p>\n<h3><span class=\"ez-toc-section\" id=\"Do_REP_rules_apply_every_year\"><\/span>Do REP rules apply every year?<span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>Yes, you must meet the criteria annually; status can change year to year based on time spent and participation.<\/p>\n<\/div>\n\n\t\t\t\t\t\t\t\t\t\t\t<\/div>\n\n\t\t\t\t\t\n\t\t\t\t\t\t\t\t\t<\/div>\n\t\t\t<\/div>\n\t\t[\/vc_column][\/vc_row]<\/p>\n<\/div>","protected":false},"excerpt":{"rendered":"<p>[vc_row el_class=&#8221;pg-inr-wrp&#8221; woodmart_css_id=&#8221;6729132a68f6b&#8221; responsive_spacing=&#8221;eyJwYXJhbV90eXBlIjoid29vZG1hcnRfcmVzcG9uc2l2ZV9zcGFjaW5nIiwic2VsZWN0b3JfaWQiOiI2NzI5MTMyYTY4ZjZiIiwic2hvcnRjb2RlIjoidmNfcm93IiwiZGF0YSI6eyJ0YWJsZXQiOnt9LCJtb2JpbGUiOnt9fX0=&#8221; mobile_bg_img_hidden=&#8221;no&#8221; tablet_bg_img_hidden=&#8221;no&#8221; woodmart_parallax=&#8221;0&#8243; woodmart_gradient_switch=&#8221;no&#8221; woodmart_box_shadow=&#8221;no&#8221; wd_z_index=&#8221;no&#8221; woodmart_disable_overflow=&#8221;0&#8243; row_reverse_mobile=&#8221;0&#8243; row_reverse_tablet=&#8221;0&#8243;][vc_column][vc_row_inner content_placement=&#8221;middle&#8221; el_class=&#8221;client-review-secs box&#8211;card&#8221; woodmart_css_id=&#8221;672e712482714&#8243; responsive_spacing=&#8221;eyJwYXJhbV90eXBlIjoid29vZG1hcnRfcmVzcG9uc2l2ZV9zcGFjaW5nIiwic2VsZWN0b3JfaWQiOiI2NzJlNzEyNDgyNzE0Iiwic2hvcnRjb2RlIjoidmNfcm93X2lubmVyIiwiZGF0YSI6eyJ0YWJsZXQiOnt9LCJtb2JpbGUiOnt9fX0=&#8221; mobile_bg_img_hidden=&#8221;no&#8221; tablet_bg_img_hidden=&#8221;no&#8221;<\/p>\n","protected":false},"author":6,"featured_media":44301,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[17],"tags":[20],"class_list":["post-1491","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-blog","tag-rental-property"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v27.8 (Yoast SEO v27.8) - https:\/\/yoast.com\/product\/yoast-seo-premium-wordpress\/ -->\n<title>REPS - Real Estate Professional Defined - REP Status - WCG CPAs &amp; 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To deduct rental losses that would otherwise be carried forward or to avoid net investment income tax.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/wcginc.com\/blog\/real-estate-professional-defined\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Real Estate Professional Defined\" \/>\n<meta property=\"og:description\" content=\"Why designate myself as a real estate professional? 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