Property management fees are a common expense for rental property owners, but some wonder if they’re tax-deductible. Good news: Yes, you can write off property management fees, and doing so can significantly lower your taxable income.
But when it comes to rental property tax information, that’s just the tip of the ice berg.
Before we go further, this is not tax or financial advice. We are property management experts and not tax professionals. This blog is for informational purposes, so please consult a tax professional to confirm information and clarify any questions.
“Tax strategy can be extremely complicated,” explains Joshua Sterling, owner of Epic Property Management. “But since we serve owners at every level—from those who are brand-new to rental investing to expert investors with many properties—we don’t believe there are any silly questions on this important topic. Simply put, the better you understand rental property taxes, the more you can impact your bottom line.”
First, let’s clarify what it means to write off property management fees, and then we’ll get into increasingly advanced levels of detail. Depending on where you are in your rental property investment journey, you may want to skip ahead to the sections most relevant to your level of tax expertise, so here’s the outline:
- What Does “Writing Off” Mean?
- Why Property Management Fees Qualify as a Deduction
- What Services Can an Owner Write Off?
- Common Misconceptions
- Distinguishing Between Personal and Business Expenses
- Business Structure and Taxes
- 1031 Exchanges and Capital Gains
- The Role of Tax Professionals
- How to Claim Deductions
- State-Specific Considerations
What Does “Writing Off” Mean?
A write off is any expense that you can subtract from your total income, thereby reducing your taxable income. For rental property owners, write-offs can include costs like repairs, mortgage interest, and professional services such as property management.
Speaking of interest, mortgage interest is one of the largest deductible expenses for landlords. If you have a loan on your rental property, the interest portion of your mortgage payments can typically be deducted from your rental income. However, only the interest (not the principal portion) qualifies as a deductible expense.
Essentially, these deductions help ensure you’re only taxed on the income left after covering necessary business expenses.
Why Property Management Fees Qualify as a Deduction
The IRS classifies property management fees as an ordinary and necessary expense for generating rental income. This classification makes them deductible. By hiring a Michigan property management company, you’re paying for services that directly support your rental business, from finding tenants to handling maintenance and legal compliance.
For instance, in Michigan, landlords often face additional expenses related to maintaining properties during harsh winters. Snow removal, ice mitigation, and ensuring heating systems are operational are all crucial for tenant safety and satisfaction. The fees you pay your property management company to handle these seasonal requirements are also deductible, as they fall under ordinary and necessary rental expenses.
As an example of how this all works, imagine you own a rental property that generates $30,000 in annual income. Because you wisely chose a flat-rate property management service, you pay $1,188 in property management fees for services such as tenant screening, rent collection, maintenance, and more. By deducting these fees, your taxable rental income drops to $28,812, reducing the amount of taxes you owe.
What Services Can an Owner Write Off?
Property management fees are one of a variety of services essential for the effective operation of rental properties. The IRS allows landlords to deduct these fees as ordinary and necessary expenses incurred in managing, conserving, and maintaining rental property.
Here are some examples of what services you can write off:
Marketing/Leasing: This includes advertising the property, screening applicants, and finalizing lease agreements. Expenses related to these activities are considered ordinary and necessary for generating rental income and are therefore deductible.
Utilities: If you, as the landlord, pay for utilities such as electricity, gas, water, trash removal, or internet for your rental property, these expenses are fully deductible. However, do note that if your tenant reimburses you for any utilities, that amount must be reported as rental income.
While mentioned below, it’s worth adding here as well: if renting out a portion of your property, only the percentage of utilities attributed to the rental space are deductible.
Travel Expenses: If you travel to manage your rental property—whether for inspections, maintenance, collecting rent, or meeting with tenants—you may be able to deduct related expenses. This includes mileage for driving to and from the property, as well as airfare, lodging, and meals for long-distance rental management. However, the IRS requires proper documentation, including mileage logs and receipts, to claim these deductions.
And much like renting out a portion of a property, personal trips combined with rental-related travel must be allocated accordingly, with only the rental-related portion being deductible.
Maintenance: Scheduling repairs and ensuring the property remains in good condition are crucial for maintaining the property’s value and habitability. The IRS allows deductions for expenses paid for maintenance and repairs, as they are necessary for the management of the rental property.
Legal Compliance: Ensuring the property adheres to all local, state, and federal regulations is a key responsibility of property management. According to NOLO’s Top Ten Tax Deductions for Landlords, fees paid to professionals like attorneys or property management companies for services related to legal compliance are deductible as operating expenses.
Certain municipalities require landlords to comply with rental property inspection and registration programs. Property management fees covering assistance with these local requirements can be deducted, as they are part of operating expenses for your rental property.
Evictions: Handling the legal and logistical aspects of tenant eviction, if necessary, is part of property management. The IRS allows deductions for legal fees paid for work related to your rental activity, including evictions.
Learn More: The Property Management Lifecycle
Common Misconceptions
Some landlords mistakenly believe that all property-related expenses, including personal-use items or capital improvements, can be written off immediately. However, expenses like renovations often need to be depreciated over time rather than deducted in a single year. It’s also crucial to distinguish between personal expenses and those directly tied to rental income.
Many properties in the Midwest are older and may require the owner to invest in improvements. For example, replacing outdated plumbing in a historic home may qualify as a capital improvement. These costs must be depreciated over time instead of being deducted immediately.
Here are some specifics:
Not All Property-Related Expenses Are Immediately Deductible
Capital Improvements
Expenses such as renovations, adding new structures (like a deck or garage), or significant upgrades (like replacing an HVAC system or a roof) are considered capital improvements. These costs must be depreciated over the property’s useful life, as defined by the IRS (typically 5, 7, 15, or 27.5 years for residential real estate).
Depreciation allows you to spread the cost over time, reflecting the gradual wear and tear or obsolescence of the improvement.
Repairs vs. Improvements
Basic repairs like fixing a leaky faucet or patching a hole in a wall are typically deductible in the year they’re incurred because they maintain the property’s current condition. However, an upgrade, such as installing a new driveway, is considered a capital improvement.
Misinterpreting Depreciation Rules
Some landlords overlook or misunderstand the depreciation of their rental property.
Land Value Is Non-Depreciable: Only the structure’s value, not the land it sits on, can be depreciated. If you fail to separate the two, you risk overstating your depreciation deduction, which could lead to penalties during an IRS audit.
IRS Form 4562 includes information on calculating and reporting depreciation for rental properties.
Partial-Year Depreciation: If you purchase a property mid-year, depreciation for that first year must be prorated based on the time the property was available for rent, otherwise known as “placed into service.”
Failing to Keep Accurate Records
Without proper documentation, landlords may incorrectly categorize or fail to claim valid deductions.
Receipts and Invoices: Always keep detailed records of expenses, including receipts for repairs, services, and supplies. Publication 583 details how to maintain records for tax purposes.
An experienced property manager will typically have an owner’s portal in their software that will allow access to reporting on all expenses. Just make sure not to miss any expenses you may have paid outside of the management company in correlation with the investment.
Mileage Logs: If you travel to manage your property, keep a log detailing dates, purposes of trips, and mileage. The IRS requires clear evidence of travel deductions.
IRS Topic 511 explains the requirements for deducting travel expenses, including the need for accurate documentation.
Distinguishing Between Personal and Business Expenses
It’s vital to separate expenses incurred for personal use from those directly tied to generating rental income. Some landlords inadvertently mix these two categories, leading to potential issues with the IRS.
Example of Personal Use Items: If you purchase a lawnmower for your personal home but also use it for the rental property, the cost is not fully deductible. Only the portion used for the rental property can be claimed, and it must be properly documented.
Shared Spaces: If you rent out part of a property (e.g., a basement or room in your primary residence), you can only deduct expenses for the rental portion. For instance, if 30% of your home is rented out, you can deduct 30% of the utilities, insurance, and maintenance costs.
For a detailed list of updated references and guidance on business expenses, the IRS has provided a “Guide to Business Expense Resources,” which consolidates information from the discontinued Publication 535 into the appropriate current publications.
Business Structure and Taxes
The structure of your rental property business can impact your tax liability and how deductions, like property management fees, are handled.
Here’s how different structures affect taxation:
Sole Proprietorships: Most individual rental property owners operate as sole proprietors, meaning rental income is reported on Schedule E of their personal tax return. Deductions, including property management fees, mortgage interest, and maintenance, are applied directly to offset rental income.
LLCs and Corporations: Some landlords choose to operate under an LLC (Limited Liability Company) for liability protection, though LLCs are typically taxed the same as sole proprietors unless they elect to be treated as an S corporation or C corporation.
LLCs (default taxation): Still report rental income on Schedule E with the same deductions as sole proprietors.
S Corporations (S-Corps): Income and deductions pass through to owners, but additional tax filing requirements apply.
C Corporations (C-Corps): Pay corporate taxes on rental income, and deductions are applied at the corporate level. This structure is less common for small-scale landlords due to potential double taxation.
1031 Exchanges and Capital Gains
A 1031 exchange lets landlords defer taxes on capital gains by reinvesting the proceeds from a rental property sale into another like-kind property. To qualify, the new property must be identified within 45 days and purchased within 180 days. This strategy helps investors grow their portfolio while postponing taxes.
Selling a rental property without a 1031 exchange means paying capital gains taxes on profits. If property is owned for over a year, gains are taxed at 15%, or 20% depending on income. Short-term gains (property owned for a year or less) are taxed at regular income rates. Additionally, past depreciation deductions are taxed at 25% upon sale (known as depreciation recapture).
The Role of Tax Professionals
Navigating tax deductions can be complex, especially when dealing with multiple properties or unique financial situations. A tax professional can help identify deductible expenses, ensure compliance with IRS rules, and optimize your tax savings.
Sterling adds, “Consulting an expert can save landlords thousands of dollars while providing peace of mind that their taxes are handled correctly.”
Learn more about how many rental properties one person or company can manage
How to Claim Deductions
To claim property management fees, report them on a Schedule E (Supplemental Income and Loss) when filing your taxes, along with all other expenses associated with the property’s operation. This form is designed specifically for rental property owners to detail income and expenses.
Property management fees are typically listed under “Other Expenses” or another appropriate category, depending on the nature of the service.
State-Specific Considerations
While federal tax laws govern most deductions, state tax rules can vary. For example, some states may have additional requirements or limits on deductions for rental property expenses. Be sure to review your state’s tax guidelines or consult a professional familiar with state-specific regulations.
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Ready to simplify your rental property management? Contact Epic Property Management today to learn how we can help you maximize your investment while reducing stress.