Tax Strategies for Property Managers

Times are tough for small business owners, and tougher still for real estate. For small business owners in the real estate industry, then, times aren’t just tough; they’re downright troublesome.

Even when your business specializes in depreciating assets, however, you can help your bottom line in a deflated economy, suggests Gary Milkwick, CPA, director of tax operations for The Tax Club, a New York-based company that provides tax counseling for small business owners.

One way to decrease expenses: reduce your tax bill. “The more you can minimize your taxes,” Milkwick says, “the more money you can put in your pocket.”

Deductions 101
An easy way for property managers to reduce tax liability, according to Milkwick, is to consider themselves small businesses—even if they’re single individuals who own a single rental property—and to therefore claim as many legitimate small business tax deductions as possible.

What’s legitimate? “I usually start with the IRS definition, which is whether or not the deduction is ‘reasonable and necessary,’” Milkwick says. “There’s a lot of gray area there, but basically, anything that’s related to the business, a small business owner can deduct.”

This year, there are even more deductions than usual, thanks largely to the American Recovery and Reinvestment Act of 2009. Among its small business tax provisions, according to Milkwick, is one allowing small business owners to deduct up to $250,000 in depreciable personal property purchased in 2009—including company-owned computers, vehicles or other business equipment—on 2009 tax returns, when the normal deduction is $125,000. Another provision allows small business owners experiencing net operating losses to carry them back up to five years instead of two, potentially enabling many property managers to claim retroactive tax refunds if they end up having a bad 2009.

Set yourself up for savings
You may be able to reduce your tax burden even further simply by putting the right systems in place for governing your business.

Milkwick suggests starting with your business entity. “If you’re a property manager who is paid to manage properties for others and make $100,000 in profit, and you put everything on your personal tax return as a sole proprietor, you’re going to have to pay self-employment tax on top of your regular income tax, which is 15.3 percent,” he says. “That adds up quickly.”

Organizing your business as a corporation (S corporation or LLC) instead of a sole proprietorship can eliminate or reduce the amount of self-employment tax you pay and will allow you to more easily separate your business tax data from your personal tax data. This can help your accountant maximize your allowable deductions when he or she is preparing your tax return.

Real estate tips and tricks
Here are two of the most common industry-specific strategies that can help property managers minimize their tax burdens, according to Paul Kaplan, CPA, managing director of KW Property Management & Consulting in Coral Gables, Fla.:

• Cost Segregation: Typically, when property managers purchase rental or investment properties, the IRS requires them to depreciate the property over a period of many years . Thanks to cost segregation, however, owners can break the property down into several components and depreciate those components individually—and often, more quickly. “Instead of depreciating the property over the course of the building’s life, you can segregate out different aspects of the building that have a shorter life—appliances, furniture, fixtures—and depreciate them individually,” Kaplan says. “By accelerating the depreciation from 30 years to five years for different aspects of the building, you can take more deductions more quickly.”
• Property Tax Appeals: While property managers often worry about reducing federal tax burdens, many neglect to minimize local tax burdens, says Kaplan, who recommends doing that by contesting your buildings’ property taxes with the county. “A lot of product in today’s market has values that are inflated, because the properties were assessed two years ago,” he says. “Because your neighbor’s unit, in actuality, might have traded for 50 cents on the dollar compared to what you paid for yours, you should hire a professional to contest your value.”

A final tax-saving strategy, according to Milkwick, is to classify yourself with the IRS as a real estate professional. “Often, real estate investors experience losses,” he says. “The IRS generally considers those to be passive losses, and for taxation purposes they can only offset passive income. If you’re classified as a real estate professional, though—you have to spend at least 750 hours performing real estate activities, representing more than 50 percent of your time spent on professional activities—your losses become active losses, which you can use to offset active income, such as W-2 wages, self-employment income, and so on.”