Becoming a residential landlord or owning a commercial property comes with new tax responsibilities. Learn about property management tax deductions and how to handle your new tax situation.
Property management and your taxes
If you become a professional or part-time property manager or you start renting out properties to tenants, it could mean years of steady income. This income is subject to taxes, but it can also carry tax advantages, like property management tax deductions, write-offs, and more. As a result, you'll want to understand these items better come tax time each year.
This article reviews the details you need for managing taxes as a professional or part-time property manager, including:
- How to file your taxes
- How to manage your tax liability
- Which forms you'll need to prepare and file
- Deductible expenses
How should a property manager file taxes?
Many property managers qualify as self-employed. Others may work for a property management company or directly for a landlord as an employee, or they might manage property as an independent contractor. In all three cases, you'll owe taxes on any earnings you receive from managing property.
If you work for a property management firm or landlord as an employee, you'll face the same filing steps as any worker receiving a Form W-2 to report your income.
If you work as an independent contractor, you'll need to account for self-employment taxes, that includes both the employee and employer portions of Social Security and Medicare contributions. You can also deduct other business-related expenses that could save you money on your taxes.
If you're a self-employed property manager of your own rental property, you'll face a different tax liability altogether. You'll need to pay taxes on your rental income but you can't take a deduction for the value of your time and labor for managing the property.
You can reduce your rental income by subtracting qualified deductible expenses. For example:
- The cost of getting your property ready to rent
- Paid advertising for attracting tenants
- Maintenance performed by others
- Supplies and materials
- Insurance payments
Some owners hold rental properties in pass-through entities. The income from a pass-through entity passes through the company to your personal tax returns and isn't subject to company-level taxation. If your real estate is held in a single member Limited Liability Company (LLC) to limit your liability, you'll still report your income on Schedule E. In this case the pass through entity is considered a "disregarded entity" by the IRS and there is typically not a separate entity tax return required for federal taxes. However, many states do require that you file an entity tax return even for single member LLCs.
If your business structure is a partnership or S Corporation then you will need to report your rental income and expenses using Form 8825, Rental Real Estate Income and Expenses of a Partnership or an S Corporation. This form is included as part of the entity's tax returns. You will then receive a Form K-1 from the entity showing your share of profits and losses that you will use to complete your personal tax returns.
Which property management tax deductions can I claim?
If you manage your own rental real estate, you'll have many property management tax deductions available to lower your tax bill. If you choose to outsource your property management, all expenses related to paying a property manager are typically tax deductible. If you work as an employee for a property management firm, these deductions aren't available to you for your federal taxes.
Renting your property means you'll often face several expenses for upkeep, insurance, sourcing tenants, and more. Some of the most common tax deductible expenses you'll encounter as a property manager include:
- Cleaning and maintenance
- Homeowner association dues and condo fees
- Insurance premiums
- Interest expenses
- Local property taxes
- Management fees
- Pest control
- Equipment rentals
- Rents you paid to others
- Building supplies
- Trash removal fees
- Travel expenses
- Yard maintenance
When you look to claim these property management tax deductions, they must all qualify as ordinary and necessary.
Some expenses may mix business duties with your personal situation. For example, if you have a rental property and need to travel to it, you can deduct the cost of travel to your rental property. But you can only do this if the primary purpose of this travel is to check on the property or perform tasks related to it.
If the trip had multiple purposes — for example, you were driving to check the gas meter at the rental property but then went to the dentist — you must divide the travel costs between deductible business expenses and nondeductible personal costs.
What are passive activities and how do they affect me?
By default, IRS categories renting property as a passive activity. This means that, unlike non-passive activity such as earning wages, it's considered a passive business activity. Typically, renting property is subject to passive activity loss rules, which can limit your ability to offset income with losses. Namely, you typically can only offset income from passive activities with passive losses.
Fortunately, you may qualify for an exception to these rules by actively participating in a rental real estate activity. When you do, you can deduct up to $25,000 of your rental loss even though the IRS considers it passive.
To qualify for active participation in managing your rental real estate, you must:
- Own at least 10% of the property
- Make major management decisions, such as choosing rental property managers, approving new tenants, setting rental terms, and approving improvements
This exception phases out as your income rises. Specifically, if you have a modified Adjusted Gross Income (MAGI) over $100,000, the $25,000 rental real estate exception phases out by $0.50 for every dollar over $100,000. Your exception completely phases out when your MAGI reaches $150,000.
For example, if you actively participated in the rental and have a MAGI of $95,000 with a rental loss for the year of $21,000, you can deduct your entire rental loss from your active activity income even though it considered a passive activity.
If your loss had risen to $29,000, you could only deduct the $25,000 maximum for the year. The nondeductible balance of $3,000 moves to future years as a passive activity loss carryforward.
If you file separately as a married couple and lived apart during the year, your maximum rental real estate loss exception comes to $12,500 with a MAGI phase-out beginning at $50,000 instead of $100,000.
If you spend considerable time in real estate activities during the year, you may qualify for an even more favorable rule for real estate professionals. This disregards passive activity loss rules from certain rental real estate activities, making them fully deductible in the year they occur.
What tax responsibilities do I have as a property manager?
As a property manager, you must track your deductible business-related expenses as well as your income to calculate your net rental income. This holds true whether you're a property owner, or a contracted property manager.
If you paid property management fees or brokers' commissions to a non-incorporated business, you should report these payments to the IRS if they exceed $600. This will be reported on Form 1099-MISC for rent or Form 1099-NEC if paid as nonemployee compensation.
If you need to hire outside labor, such as an emergency plumber, and the total payment exceeds $600, you might need to issue a 1099 form to report this payment.
If you don't own the real estate and only manage the property, you should still keep track of all income, expenses, and disbursements to property owners.
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