If you become a professional or part-time property manager or start renting properties to tenants, it could mean years of stable income. This income is subject to tax, but it may also have tax benefits, such as tax deductions for property management, write-offs, etc. Therefore, you will want to better understand these items at tax time each year.
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This article goes over the details you need to manage taxes as a professional or part-time property manager, including:
- How to file your taxes
- How to manage your tax liability
- What forms you will need to prepare and file
- Deductible expenses
How should a property manager file their taxes?
Many property managers qualify as independent. Others may work for a property management company or directly for a landlord as an employee, or they may manage the property as an independent contractor. In all three cases, you will have to pay taxes on the income you receive from managing the property.
If you work for a property management company or landlord, you will face the same filing steps as any worker receiving a W-2 form to report your income.
If you work as an independent contractor, you will need to account for self-employment taxes or employee and employer shares of social security and health insurance contributions. You can also deduct other business-related expenses that could save you money on your taxes.
If you are an independent property manager of your own rental property, you will face an entirely different tax liability. You will have to pay taxes on your rental income.
You can reduce your rental income by subtracting eligible deductible expenses. For example:
- The cost of preparing your property for rental
- Paid advertising to attract tenants
- Maintenance costs
- Insurance payments
You will report your rental income and expenses on Schedule E, Additional Income and Losses, and file them with your Form 1040.
Some landlords hold rental properties as flow-through entities. This means that your business income is treated as your personal income and is not subject to corporation tax. If your real estate is held in a flow-through entity to limit your liability, you will need to report your rental income and expenses on Form 8825, Real Estate Rental Income and Expenses of a Partnership or S Corporation.
What property management tax deductions can I claim?
If you manage your rental property yourself, you will have many tax deductions for property management to reduce your tax bill. If you choose to outsource your property management, all expenses related to paying a property manager are tax deductible. If you work as an employee of a property management company, you cannot claim these deductions.
Renting your property means that you will have to face several expenses for maintenance, insurance, finding tenants, etc. Some of the most common tax deductible expenses you will encounter as a property manager include:
- Cleaning and maintenance
- Homeowners association dues and condominium fees
- Insurance premiums
- Interest charges
- Local property taxes
- Management fees
- pest control
- Equipment rental
- Rents you have paid to others
- Construction materials
- Garbage removal fees
- Trip costs
- Yard maintenance
When looking to claim these property management tax deductions, they should all be considered ordinary and necessary.
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Some expenses can mix professional tasks with your personal situation. For example, if you have a rental property and you need to get there, you can deduct travel expenses to your rental property. But you can only do this if the main purpose of this trip is to check the property or perform rental-related tasks.
If the trip had multiple purposes — for example, you were driving to check the rental property’s gas meter but then went to the dentist — you should split the travel expenses between deductible business expenses and non-deductible personal expenses.
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What are passive activities and how do they affect me?
The IRS generally considers leasing property to be a passive activity. This means that unlike a non-passive activity such as earning a salary, it is a business activity in which you do not actively participate or contribute. Renting property is subject to loss of passive business rules, which may limit your ability to offset income with losses. Namely, you can only offset income from passive activities with passive losses. For example, you cannot use losses from owning rental property to offset your income taxes.
Fortunately, you can benefit from an exemption from these rules by actively participating in a rental property activity. When you do, you can deduct up to $25,000 of your rental loss, even if the IRS considers it passive.
To be able to actively participate in the management of your rental property, you must:
- Own at least 10% of the property
- Make important management decisions, such as approving new tenants, setting lease terms, and approving improvements
This exception disappears as your income increases. Specifically, if you have a Modified Adjusted Gross Income (MAGI) greater than $100,000, the $25,000 rental property exception decreases by $0.50 for each dollar over $100,000. Your exception disappears completely when your MAGI reaches $150,000.
For example, if you actively participated in rental and you have a MAGI of $95,000 with a rental loss for the year of $21,000, you can deduct your entire rental loss even if it qualifies. of passive.
If your loss had reached $29,000, you could only deduct the maximum of $25,000 for the year. The non-deductible balance of $3,000 is carried forward to future years.
If you file separately as a married couple and live apart during the year, your maximum rental property loss exception is $12,500 with a MAGI phase-out starting at $50,000 instead. of $100,000.
If you devote a considerable amount of time to real estate activities during the year, you could benefit from an even more favorable rule for real estate professionals. This ignores the passive activity loss rules of 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 need to track your deductible business expenses as well as your income to calculate your net rental income. This is true whether you are a landlord, contracted property manager or property management employee.
If you paid property management fees or brokerage commissions, you must report them to the IRS if they exceed $600. This will be reported on Form 1099-MISC for rent or Form 1099-NEC if paid as non-salaried compensation.
If you need to hire outside labor, such as an emergency plumber, and the total payment exceeds $600, you will need to issue a Form 1099 to report that payment.
If you don’t own the property and only manage the property, you still need to keep track of all income processed but not received (such as rent collected and paid to the property owner).
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