The cost of hiring a property management company to handle investment properties is much cheaper than most property owners believe. Investment property owners who manage their own properties with the idea that property management costs are too much may be mistaken for the actual costs. In addition, most property owners do not take advantage of all the tax strategies available to them. For example, if a property owner manages their investment portfolio outside of headquarters, there may be some business-related items that they don’t issue. Interest in all forms including mortgage interest, equity line credit interest, and business loan interest are all expenses that are usually deductible. Losses such as fatalities, disasters, and theft are costs that are properly calculated and can be deducted. The most overlooked deduction is investment property depreciation, and for real estate professionals as defined by IRC 179, investment property owners may overcharge their depreciation deductions. To maximize return on investment, every property owner should educate themselves on tax strategies, and thoroughly evaluate their entire tax planning roadmap with a competent tax attorney or certified public accountant.
The Consolidated Tax Bracket Percentage Determines the True Cost of an Expenditure in Your Investment Property Business
First of all property owners must understand this basic concept. If their annual income from all their activities puts them in the combined, federal, state, and local tax brackets of 50%, then the usual and necessary business expenses are actually fifty cents ($0.50) for every dollar ($1 ,00 ) was spent. It’s easy to think of it this way: If a dollar ($1.00) is spent on advertising, then a dollar ($1.00) is legally charged. If someone falls into the 50% pooled tax bracket then they are actually only spending fifty cents ($0.50). This is because the one dollar ($1.00) they spend actually reduces their taxable income by one dollar, thereby reducing their tax liability by fifty cents ($0.50). So any regular and necessary expenses are actually only 50% of the actual cost.
Now that you think about the concept if a property manager charges you $200/month to manage their single family residence rental property, the actual (year-end) cost to the owner is only $100/month as property management fees are a common and necessary business expense and completely deductible. Now consider that a 50% reduction in your perceived costs and perhaps property management doesn’t seem so expensive anymore. Add also the impact on the time, energy, effort you spend managing the property. Add to that the cost of gasoline required to drive by the property once or twice a month. Finally, add the comfort of knowing a professional property manager can actually take care of your property and you don’t have to spend all this money, time, energy and effort and maybe, just maybe, you will reconsider using an advanced property manager because you now realize that they really not expensive for the service they provide.
Home Office Reductions are Complicated, but can be Legit
If the home office is used 100% for ordinary and necessary business reasons then there is no reason one should not take advantage of the outlay of home office square footage, equipment, materials, supplies and any utilities paid for to help operate the office. The problem lies when the home office is used for personal reasons as it is difficult to prove what percentage of the home office is actually a regular and necessary business expense. There are many Internal Revenue decisions on these different matters, and each one demonstrates the difficulty of striking the right balance between business and personal expenses, and more importantly, being able to prove it in an audit. If you are considering running a property management business outside of your home office, be careful. While there are many legitimate expenses that are clearly available to you, there are some that are not.
Interest Expense Sometimes Ignored
When you are evaluating your interest expenses, do not forget to charge any interest from your home equity line of credit as this can easily be overlooked. Also, if you have a small business loan, that interest is also deductible.
Disaster, Theft Loss Can Be Reduced
If a loss occurs during your business cycle, the cost is deductible provided you have a good record of the lost items. There is almost always an offset as well for any insurance reimbursement, but the point here is that losses should be fully evaluated as you prepare your tax strategy.
Real Estate Professional Depreciation and Internal Revenue Code
When planned properly, the “non-cash” cost of depreciating someone’s rental property can be the difference in paying taxes or realizing the benefit of a tax loss. Most residential investment properties are depreciated over a period of 27.5 years. Commercial property is depreciated over 39 years. However, if a person is classified as a “Real Estate Professional” according to the Internal Revenue Code 179, then the benefits of owning an investment property are much greater. Without going into further detail, a real estate professional’s personal property portfolio is treated differently from a typical investor. If this is interesting enough, one should investigate the merits of this little-known exception in IRC and the real estate industry.
Contact a Competent Tax Lawyer or Certified Public Accountant to Review All Your Current Tax Strategies and Any Future Planning With Your Investment Property
The information contained in this article is in no way tax advice, but just some ideas to ponder as you consider your next tax situation. Everyone who owns a rental property business should consider tax planning and tax strategies with a competent professional who specializes in taxes. There are many legal ways to take full advantage of tax laws and your professional status in the context of property management, but these decisions need to be considered carefully with a tax professional.