Property Management, Investment Property Tax Deductions and Strategies for Real Estate Professionals
The cost of hiring a property management company to handle investment properties is significantly less than most homeowners realize. Owners of investment properties who manage their property under the assumption that property management costs are too high may be mistaken as to the actual real costs. Additionally, a large percentage of homeowners do not take advantage of all the tax strategies available to them. For example, if a property owner manages his investment portfolio from his home office, he may not be spending some business-related items. Interest in all its forms, including mortgage interest, interest on home equity lines of credit, and any business loan interest, are expenses that are generally deductible. Losses such as accidents, disasters and theft are expenses that, properly accounted for, are deductible. The most overlooked deduction is investment property depreciation, and for real estate professionals as defined by IRC 179, an investment property owner can boost their depreciation deductions. To maximize return on investment, each homeowner should educate themselves on tax strategies and thoroughly evaluate their entire tax planning roadmap with a competent tax attorney or certified public accountant.
The Combined Tax Bracket Percentage determines the actual cost of an expense in your investment property business
First of all, a property owner must fully understand this basic concept. If your annual income from all of your activities put you in the 50% combined federal, state, and local tax bracket, then your ordinary and necessary business expenses are actually fifty cents ($.50) on the dollar ($1.00). ) spent. It’s simple to think of it this way: if a dollar ($1.00) is spent on advertising, then that dollar ($1.00) is spent legally. If a person is in the combined 50% tax bracket, they have actually only spent fifty cents ($.50). This is because the dollar ($1.00) they spent actually reduces their taxable income by one dollar, which reduces their tax liability by fifty cents ($.50). So each ordinary and necessary expense is really only 50% of the actual cost.
Now that you have that concept in mind, if a property manager is charging you $200/month to manage your single-family residence rental property, the actual cost (at the end of the year) to the owner is only $100/month because Property management fees are an ordinary and necessary business expense and fully deductible. Now consider that 50% reduction in your perceived cost and maybe property management doesn’t seem so expensive anymore. Add to that the impact on your time, energy, and effort that you put into managing that property. Add to that the cost of gas needed to drive by that property once or twice a month. Finally, add to that the comfort of knowing that a professional property manager could be looking after your property and you wouldn’t have to go through all of this expense, time, energy and effort and maybe, just maybe, you’d reconsider using a property manager instead. the future because now he realizes that they really are not that expensive for the services they provide.
Home Office deductions are tricky, but can be legitimate
If a home office is used 100% for ordinary and necessary business reasons, then there is no reason an individual should not leverage the expense of home office square footage, equipment, materials, supplies and utilities paid to help operate. the office. The problem is when the home office is used for personal purposes because it is difficult to prove what percentage of the home office is actually an ordinary and necessary business expense. There are many Internal Revenue decisions on this varied topic, each showing the difficulty of striking the right balance between business and personal spending and, more importantly, being able to prove it in an audit. If you are considering running your property management business from your home office, beware. Although there are many legitimate expenses that are clearly available to you, there are several that are not.
Interest expense gets overlooked at some point
When evaluating your interest expense, don’t forget to account for the interest on your home equity line of credit, as this can be easily overlooked. Also, if you have a small business loan, that interest is also deductible.
Disaster and theft losses are deductible
In the event a loss occurs during your business cycle, those expenses are deductible as long as you have a good record of the items that were lost. There would almost always be compensation for insurance reimbursements as well, but the point here is that losses should be fully assessed as you prepare your tax strategies.
Depreciation and the Internal Revenue Code Real Estate Professional
When planned correctly, the “non-cash” expense of rental property depreciation can be the difference in paying taxes or realizing the benefit of a tax loss. Most residential investment properties depreciate over a period of 27.5 years. Commercial property depreciates over 39 years. However, if a person were classified as a “Real Estate Professional” under Internal Revenue Code 179, then the benefits of owning investment property would be much greater. Without going into too much detail, a real estate professional’s personal property portfolio is treated differently than that of a typical investor. If this is tempting enough, one should investigate the benefits of this little-known exception in IRC and the real estate industry.
Contact a competent tax attorney or certified public account to review all of your current tax strategies and any future planning with your investment properties.
The information contained in this article is in no way tax advice, but simply some ideas to contemplate the next time you consider your tax situation. Anyone who owns a rental property business should consider tax planning and tax strategies with a competent tax professional. There are numerous legal ways to take full advantage of the tax laws and your professional status within the property management context, however these decisions should be carefully considered with a tax professional.