The cost of hiring a property management company to handle investment properties is significantly less than most homeowners realize. Investment property owners who manage their property with the idea that property management costs are too high may be misguided as to the actual actual 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 interest on any business loan, are expenses that are generally deductible. Losses such as accidents, disasters and theft are expenses that are duly accounted for and are deductible. The most overlooked deduction is depreciation for investment property, and for real estate professionals as defined by IRC 179, the owner of an investment property can boost their depreciation deductions. To maximize return on investment, every homeowner should educate themselves on tax strategies and thoroughly review their entire tax planning roadmap with a competent tax attorney or CPA.

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 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) for every dollar ($1.00). ) spent. It’s simple to think of it this way: if one 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 gas expense required 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 taking care of your property and you wouldn’t have to have all this expense, time, energy and effort and maybe, just maybe, you would reconsider using a property manager instead. the future because now she 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 take advantage of the expense of home office square footage, equipment, materials, supplies and utilities paid to help operate. the office. The problem lies 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, and each one shows 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 your property management business from your home office, be careful. Although there are many legitimate expenses that are clearly available to you, there are several that are not.

Interest expense is overlooked at some point

When evaluating your interest expense, don’t forget to factor in the interest on 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 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 refunds as well, but the point here is that losses need to 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 gaining 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 an investment property would be much greater. Without going into too much detail, a real estate professional’s personal property portfolio is treated differently than 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 by no means tax advice, but merely some ideas to consider 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 context of property management, however these decisions should be carefully considered with a tax professional.