The cost of hiring a property management company to handle investment properties is significantly less than most property owners believe. Investment property owners who manage their property with the idea that property management costs are too much might be mistaken about actual real costs. Additionally, many property owners do not take advantage of all the tax strategies available to them.
For example, if a property owner manages their investment portfolio out of their home office, some business-related items are not expensing. Interest in all forms, including mortgage interest, equity lines of credit interest, and any business loan interest, are all expenses that are typically deductible. Losses like casualties, disasters, and thefts are expenses that are properly accounted for and are deductible.
The most overlooked deduction is depreciation on investment properties, and for real estate professionals, as defined by IRC 179, an investment property owner can supercharge their depreciation deductions. To maximize one’s return on investment, each property owner should educate themselves about tax strategies and thoroughly evaluate their entire tax planning roadmap with a tax attorney or competent certified public accountant. Combined Tax Bracket Percentage Determines the True Cost of an Expense in Your Investment Property Business
First of all, a property owner must fully understand this basic concept. Suppose their annual income from all of their activities placed them into the combined federal, state, and local tax bracket of 50%. In that case, their ordinary and necessary business expenses are, in actuality, fifty cents ($.50) for every dollar ($1.00) spent. It’s simple to think about it this way: If one dollar ($1.00) is spent on advertising, then that one dollar ($1.00) is legally expensed.
If a person is in the 50% combined tax bracket, then they have actually only spent fifty cents ($.50). This is because the one dollar ($1.00) they spent actually reduced their taxable income by one dollar, thus reducing their tax liability by fifty cents ($.50). So each ordinary and necessary expense is truly only 50% of the actual cost. Try Updates.
Now that you understand that concept, if a property manager charges you $200/month to manage their single-family residential rental property, the actual (end-of-year) cost to the owner is only $100/month because the 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 the impact on the time, energy, and effort you spend managing that property. Add the gasoline expense necessary to drive by that property once or twice a month.
Finally, add to that the comfort of knowing a professional property manager could be taking care of your property. You wouldn’t have these expenses, time, energy, and effort. Maybe, just maybe, you would reconsider using a property manager in the future because you now realize that they aren’t that expensive for the services they provide.
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Home Office Deductions are Tricky but can be Legitimate
Suppose a home office is used 100% for ordinary and necessary business reasons. In that case, there is no reason a person shouldn’t be taking advantage of expensing the home office square footage, the equipment, the materials, the supplies, and any utilities paid to help operate the office. The problem lies when the home office is used for personal reasons. It isn’t easy to prove what percentage of the home office is an ordinary and necessary business expense.
There are many Internal Revenue decisions on this issue. Each one shows the difficulty in achieving the correct balance between business and personal expenses and, more importantly, proving it in an audit. Be careful if you are considering running your property management business out of your home office. Although many legitimate expenses are available to you, several are not.
Interest Expense is Sometimes Overlooked
When you evaluate your interest expenses, do not forget to expense any interest from your home equity line of credit, as this can be easily overlooked. Also, that interest is deductible if you have a small business loan.
Disaster, Theft Losses are Deductible
If a loss occurred during your business cycle, those expenses are deductible, provided you have a good record of the lost items. There would almost always be an offset for any insurance reimbursements, but the point here is that losses must be fully evaluated while preparing your tax strategies.
