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Property Management, Investment Property Tax Deductions, and Strategies for Real Estate Pros

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 own property with the idea that property management costs are too much might be mistaken about actual real costs. Additionally, a large percentage of property owners do not take advantage of all of 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 which properly accounted for are deductible.

Property Management, Investment Property Tax Deductions, and Strategies for Real Estate Pros 1

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. If their annual income from all of their activities placed them into the combined federal, state, and local tax bracket of 50%, then their ordinary and necessary business expenses are in actuality fifty cents ($.50) for every one 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 ($1.00) they spent actually reduces their taxable income by one dollar, thus, reducing their tax liability by fifty cents ($.50). So each ordinary and necessary expense is truly only 50% of the actual cost Try Updates.

Now that you have your mind around that concept, if a property manager is charging you $200/month to manage their single-family residential rental property, the actual (end of the 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 to that the impact on the time, energy, effort you spend managing that property. Add to that 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, in fact, be taking care of your property. You wouldn’t have to have all of 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 really aren’t that expensive for the services they provide.

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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 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 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 vary issue. Each one shows the difficulty in achieving the correct balance between business and personal expense, and more importantly, proving it in an audit. If you are considering running your property management business out of your home office, be careful. Although many legitimate expenses are clearly available to you, there are several that 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, if you have a small business loan, that interest is deductible as well.

Disaster, Theft Losses are Deductible

If a loss occurred during your business cycle, those expenses are deductible, provided you had 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.

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