Client Profile
| Industry | Real Estate Agent + STR Investor |
| Annual Revenue | $480,000 (commission) + $156,000 (STR income) |
| Prior Entity Type | S-Corporation (brokerage) + LLCs (STRs) |
| State | Florida |
| Key Metric | REPS via brokerage hours + cost seg on 3 STRs = $71K savings |
| Annual Tax Savings | $71,000 |
The Problem
This client was a full-time real estate agent earning $480,000 in gross commission income through an S-Corp, while simultaneously building a portfolio of three short-term rental properties (combined purchase price $1.45M) generating $156,000 in gross rental income. The client's prior CPA treated the brokerage income and rental activities as completely separate, with all rental losses suspended as passive under IRC §469. The CPA had never mentioned that the client's real estate brokerage hours could qualify them for Real Estate Professional Status.
As a licensed real estate agent working full-time in real property trades, the client logged over 2,200 hours per year in qualifying real estate activities (showing properties, negotiating contracts, attending closings, marketing listings, conducting property inspections). This easily exceeded both REPS thresholds: 750 hours in real property trades or businesses, and more time in real estate than any other trade or business. With REPS established, the rental losses from the STR portfolio could become non-passive and offset the agent's commission income — but only if cost segregation studies were performed to generate sufficient depreciation.
AE Tax Strategy
1. REPS Qualification via Brokerage Activities Under IRC §469(c)(7)
We documented the client's REPS qualification using detailed time logs from the brokerage CRM system (showing appointment schedules, client meetings, listing activities, and closing coordination) supplemented by calendar entries and transaction records. Total hours in real property trades or businesses: 2,240 (including both brokerage and rental management activities). The client had zero hours in any non-real-estate trade or business. Both REPS tests were satisfied. We filed the REPS election with the tax return and implemented a grouping election under Treas. Reg. §1.469-9(g) to treat all three STR properties as a single activity.
2. Cost Segregation on 3 STR Properties Under IRC §168
We commissioned cost segregation studies on all three properties. Property 1 ($620,000, beachfront condo): $211,000 reclassified (34%). Property 2 ($480,000, downtown loft): $163,000 reclassified (34%). Property 3 ($350,000, lakefront cabin): $126,000 reclassified (36%). Combined reclassifiable components: $500,000. Under 100% bonus depreciation, the entire $500,000 was deductible in Year 1. Combined with standard depreciation of $24,600 on remaining components, total Year 1 depreciation was $524,600.
3. Loss Utilization and Commission Income Offset
The $524,600 in depreciation combined with $58,000 in operating expenses and $42,000 in mortgage interest produced total STR deductions of $624,600 against $156,000 in rental income, creating a $468,600 net loss. With REPS and material participation established (the client logged 340 hours managing the STR properties, satisfying the 500-hour test through the grouped activity along with brokerage-related rental activities), the loss was non-passive. Applied against the $480,000 S-Corp commission income and other income, the loss produced approximately $71,000 in first-year tax savings at the 24% federal rate (no state income tax in Florida) after accounting for the QBI deduction impact.
Before & After Comparison
| Tax Category | Before | After | Savings |
|---|---|---|---|
| STR Cost Seg Bonus Depreciation | $0 | $500,000 | $500,000 |
| Net Loss Applied to Commission Income | $0 | $468,600 | $468,600 |
| Federal Tax Savings | $0 | $71,000 | $71,000 |
| Total | $0 | $71,000 | $71,000 |
Key Takeaways
- Real estate agents and brokers are natural candidates for REPS qualification because their brokerage hours count toward the 750-hour and more-than-half-of-working-time tests under IRC §469(c)(7).
- Brokerage CRM systems, transaction logs, and closing records provide excellent documentation for REPS hours — far better than reconstructed time logs.
- The combination of REPS qualification from brokerage activities with cost segregation on investment properties allows agents to use their own commission income to fund investments that generate massive tax deductions.
- Florida's lack of state income tax means the entire benefit comes at the federal level — agents in states with income taxes would see even larger total savings.