The Most Common Tax Deductions That Property Managers Miss
Operating statements from property managers don’t include everything that you need in order to file taxes as a real estate owner. Property managers are great at leasing up properties and managing vendors. But they are not accountants. That means they aren’t waking up every day and thinking about how to maximize tax deductions for the owner.
Here is a list of the most common tax deductions that property managers miss:
1. Real Estate Property Taxes: These are taxes levied by local governments on the value of the real estate. While seemingly obvious, property managers might miss deducting these if they don't have a clear system for tracking payments made on behalf of owners, especially if these are handled through escrow accounts or paid by the owner directly.
2. Interest Expense: Interest expense on loans related to your investment properties, including mortgages and lines of credit, are fully deductible on your tax return. Loan payments are often made by property owners directly, so they wouldn’t be included on property manager operating statements. Only the interest portion of loan payments are deductible, so it’s important to review loan statements to determine the split between interest and principal.
3. Loan Origination Costs: These are fees paid to secure a loan for a business or investment property. These costs can often be amortized and deducted over the life of the loan. Property managers might miss this if they treat these fees as part of the property's basis rather than as a separate deductible expense.
4. Depreciation: Owners can deduct a portion of the cost of the property (excluding land) and its improvements over their useful life. The useful life depends on the type of asset and requires close tracking to calculate the correct annual depreciation amount. Depreciation is typically outside the scope of property manager operation statements, or if depreciation is included property managers might not always ensure the correct depreciation schedules are being applied, especially for components of the property or when capital improvements are made.
5. Annual Entity Renewal and Business License Fees: If the property is held within a legal entity (like an LLC), the annual fees to maintain that entity and any required business licenses are deductible expenses related to the property ownership. Property managers might not always be privy to these administrative costs incurred directly by the owner.
6. CPA and Legal Fees: Fees paid to accountants for tax advice related to the investment property or to attorneys for legal services directly concerning the property (e.g., lease agreements, eviction proceedings) are deductible. Property managers might not always have full visibility into these direct owner expenses.
7. Virtual Mailbox Services: If the owner uses a virtual mailbox specifically for managing communications related to the rental property, this cost is a deductible business expense. Property managers might not be aware of or consider this a deductible expense for the owner.
8. Software Subscriptions: Software subscriptions used by the owner to manage the property (e.g., accounting software, asset management tools) are deductible expenses. Property managers might focus on their own software costs and overlook those incurred directly by the owner.
9. Asset Management Fees: If the property pays asset management fees to a GP or third-party asset management company, these are deductible expenses. Property managers need to ensure these fees, if paid separately by the owner, are considered for tax purposes.
10. Other Owner-Incurred Expenses: Other expenses incurred by the owner that are directly related to the property (e.g., travel costs to visit the property for repairs oversight, meeting with contractors, etc.) are also deductible. Property managers might not always track or be aware of these direct owner expenses.
Owners should not rely on property managers to capture all tax deductions on their behalf. Instead, owners need to implement their own expense tracking system to ensure they are optimizing tax deductions. We recommend owners maintain a second accounting system that includes property-level expenses as well as owner-level expenses.
Consulting with a tax professional is always recommended for personalized advice.
