Can Hiring An Investment Property Management Company "Cost" You At Tax Time?

We all understand that hiring an investment property management company to manage your apartment property, or other rental real estate, will cost you money. What is less clear however, is how hiring a property manager will affect you from a tax perspective. In other words, will it cost you even more at tax time than what you are already paying for the management services? Let's have a look.

A rental property is a business. And although the objective of every business is to be profitable, there are years when your "business" may lose money. If this is the case, it is in your best interest to be able to deduct that loss from other income that you have earned in order to reduce the overall amount of income taxes that you pay. In fact, prior to 1987, many people purchased real estate simply to be able to use the losses it produced to reduce the taxes owed on other income earned. (If you have heard the term "tax shelter" before, this is what it refers to.) From 1987 onward, the ability to deduct losses from rental real estate against other income has been all but eliminated, unless you have "actively participated" in the investment property management. If you have actively participated in the property's management duties, then you may qualify for what is called the $25,000 exemption. In which case you may be able to deduct up to $25,000 in losses from your real estate from your other income such as wages, salary, interest etc.

Now, if your rental property consistently earns an income year in and year out, then the extent of your personal involvement in the management of your property is not an issue. It is only in the situation where your income property posts a loss from operations that the question of who performed the management duties becomes relevant. So the big question becomes this.

If you hire an investment property management company to manage your rental properties, are you still able to be considered actively involved in the management and hence be able to qualify for the $25,000 exemption?

If you would like to learn more about property management (which I highly recommend even if you plan on hiring someone else to manage your properties), here is a good resource called The Basic Property Management eBook.

Based on the definition of "active participation" as provided by the IRS, the answer appears to be yes. BUT. As always, check with your tax professional. Of course it is best to understand what level of property management participation is required at the beginning of the year so that you can make sure that you are meeting those requirements as the year goes by.

The bottom line is that whether or not you hire an investment property management company to run your apartment building or other rental real estate property, in order to be able to claim any losses from real estate you must actively participate in the management of that real estate. If you are interested in a more in depth discussion of the $25,000 exemption and how to qualify for it, I have prepared an article that is located in the real estate tax section of this website.

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