6 property management tax mistakes: Are you making them?

Disclaimer: This blog post is not meant to take the place of the guidance of an accountant or tax professional. Before doing anything tax- or accounting-related, consult a certified accountant.

Tax time isn’t a once-a-year thing. It’s a year-round task you need to stay on top of to keep your business and your owners compliant—and to save you and your owners money. 

If you’re new to property management taxes, there could be some big mistakes you’re making that could cost you or your owners money. Check out these six property management tax mistakes to see if you’re guilty of making them—and how to remedy them moving forward.

Mistake #1: Missing Out on Deductions

First and foremost, you want to make sure you’re deducting everything you can. In our annual tax guide, we’ve had a certified tax professional put together a list of deductions you could be taking.

This is not an exhaustive list, but here are some of the more basic deductions property managers can take. And, of course, consult a CPA to determine which deductions your business is eligible for.

Car & Travel

There are two ways to deduct your car expenses: the actual expense method and the standard mileage method.

The actual expense requires you to keep track of all your car expenses, such as gas and repairs, as well as the number of miles you drive for business. You may bet a larger deduction, however, especially if you have a high-priced car.

If you’d rather not keep a running list of how much you spend on gas, oil, repairs, car washes, and so on, you can use the standard mileage rate. With the standard rate, you only need to keep track of how many miles you drive for the business, not how much you spend on your car. For 2024, the standard mileage rate is 67 cents per mile.

You can also deduct your expenses such as airfare, transportation, and hotel when you go out of town for business. For business meals, however, you can only deduct 50% of the total cost. 

Office Expenses & Equipment

Money spent on your business office is deductible. For example, you can deduct the rent and utilities you spend for an office or other workspace outside of your home.

If you work from home, you can deduct the cost of your home office, but only if you use the space for business exclusively. Typically, the amount of the deduction is based on the percentage of your home you use for your business office. 

If you rent equipment or vehicles, the rent you pay is fully deductible. 

Marketing & Advertising

Expenses related to advertising and marketing your property management business are deductible. Advertising includes business cards and brochures; ads in newspapers, magazines, real estate publications, and online; fees paid to advertising and public relations agencies; and signage for your business.

Advertising to influence government legislation, however, is never deductible.

The costs to develop and maintain a website for your business are also deductible, as is money you spend to get people to view your website, such as SEO (search engine optimization) or paid search campaigns

Pass-Through Deductions

Many property managers have pass-through businesses—they are sole proprietors, partners in partnerships, limited liability company (LLC) owners, or S corporation shareholders. The net income from the property management business is passed through the business and taxed on the manager’s individual tax return at their individual tax rates. You can qualify to deduct up to 20% of your net business income from your personal income tax return.

Basically, you’re taxed on only 80% of business income. This deduction is scheduled to end on Jan. 1, 2026 (but it could be extended) and is not available to employees. 

Insurance

Insurance you buy for your business, such as business liability or property insurance. If you have a home office, you can deduct some of your homeowner’s insurance. Self-employed people can deduct 100% of their health insurance premiums from their income taxes (up to the amount of profit they earn from their businesses).

Legal and Professional Expenses

You can deduct fees paid to attorneys, accountants, consultants, and other professionals for any work related to your business. 

Employees and Contractors

If you hire one or more employees, your payroll, as well as costs such as health insurance and other benefits are fully deductible.

When you hire an independent contractor, that cost is deductible, too. 

Mistake #2: Missing Out on Tax Credits

While there aren’t really any tax credits that apply directly to property managers, there are still a few they can take advantage of. What is a tax credit, you might ask? A tax credit reduces the amount of taxes you owe, rather than a tax deduction, which reduces the amount of taxable income you have.

Here are a few examples of tax credits you may be eligible to receive as a property manager or a business owner:

• Investment Credit: Businesses can deduct a certain percentage of investment costs from their taxable income.

• Clean Vehicle Credit: You may qualify for a credit of up to $7,500 if you use a plug-in or fuel cell electric vehicle that you bought in or after 2023.

• Work Opportunity Tax Credit: This credit is part of a federal program to give employers a credit of up to 40% of an employee’s salary if they are part of a group that has historically faced barriers to employment, including veterans or those on long-term family assistance.
• Returning Heroes Tax Credit: Employers who hire unemployed veterans may be eligible for a tax credit of up to $5,600.

There are other tax credit programs out there that you may be eligible for. It’s important to check with your tax professional to claim the correct credits for your business.

Mistake #3: Setting Up Your Banking Structure Incorrectly

Property managers have to be very careful when setting up their banking structure. A single account through which all money passes simply won’t cut it. You have to keep your money separate from your owners’, and you’ll need a trust account to handle tenants’ security deposits, all of which is regulated by the state in which you operate.

Mistake #4: Keeping Inaccurate Accounting Records

We’ve heard it so many times from property managers. When they were just starting out, keeping an accurate chart of accounts and reconciling it every month often fell through the cracks. Receipts went missing, income and expenses were miscategorized, and money wasn’t accounted for. That led to overspending and under- or over-reporting of revenue on tax returns.

Recording every penny coming in and out of your business—and those of your owners—in real time is important for so many reasons. Attributing all income to the right account keeps you compliant with banking regulations—and keeps your money and your owners’ money separate. Recording every expense will keep you from overspending—and it’s important for calculating your deductions. Tracking every travel, marketing, legal, and vendor expense will pay off in the number of deductions you can take. 

Having property management software with accounting features can help you do that.

A good property management software will have accounting tools tailored to the needs of property managers, who are handling not only their finances, but those of their owners—not to mention security deposits from tenants. The software should record income and expenses in real time based on invoices generated, bills paid, and rent collected.

Mistake #5: Waiting to File 1099s

We get it. Filling out and filing 1099s can be a real pain. It’s time-consuming. And if you don’t have that property management accounting software that we just talked about, you’re going to be hunting down every invoice and payment you made for the past year.

Luckily, there are tools that can help you generate and e-file 1099s automatically, from your chart of accounts. And if you use software such as Buildium, you can even start the process earlier than when the IRS opens filing. 

Mistake #6: Not Taking Advantage of a 1031 Exchange

A 1031 exchange lets owners or property managers reinvest the proceeds from the sale of a business or investment property into a like-kind investment in order to defer paying a capital gains tax. It’s one of the most popular sections in the Federal tax code because it allows owners of rental property or other business real property to save big.

If you are a property manager who owns property, or if you’re helping your owners buy and sell properties, knowing how to take advantage of a 1031 exchange can save money and boost your reputation with your owners.

To learn more, check out our blog post on 1031 exchanges.

Every property management tax mistake is, at best, a missed opportunity to save money and, at worst, a potential compliance issue. It’s important to consult an accountant and a tax professional when working through your accounting practices and when filing your taxes.

To learn how Buildium can help you start keeping an accurate chart of accounts and keep your books tax compliant, sign up for a free trial, or schedule a demo.