Tax Q - my C corp is prop manager for my rentals? - Posted by Katerina

import · March 31, 2011, 1:12pm

Posted by Katerina on April 04, 2011 at 17:00:18:

Wow, that’s not the answer I was expecting, but I do appreciate the details. I guess it’s a completely different way to look at it.

One of the big reasons for running things through my management company was simplier accounting for expenses. We have couple investors that we are doing deals with as partners and were planning to start doing buy and hold with them. So let’s say I take a day to drive around and check the rentals, it would be much easier to just deduct the cost of gas/mileage to the company as a business expense instead of dividing it between each rental I visited and then have to report the individual portions to each owner (us and entities with our partners). Same goes for basic office overhead expenses (invoicing costs, postage, utilities, fax line and etc).

Am I looking at it from a wrong standpoint?

The other reason was being able to use the “higher management” excuse in negotiations and communication with tenants. It seems like they respect the “management company” more than just us personally as landlords and don’t try to walk over us like they did when we were just a couple who rented them a house.

I would appreciate any feedback.

Thanks

Katerina

import · March 31, 2011, 1:12pm

Tax Q - my C corp is prop manager for my rentals? - Posted by Katerina

Posted by Katerina on March 31, 2011 at 13:12:58:

I have 2 rental properties that are in my name. I also have a C corp that I do rehabs through. My C corp is my property manager for the 2 rentals. I did this mainly to have tenants deal (write checks, call and such) with a corporation instead of me personally and be able to have corp benefits. I just started this in 2010 and want to make sure I report it correctly.

All rental income and expenses flow through a dedicated rental account for C Corp. C corp also charges a management fee.

Please let me know it this is correct reporting.

For corporate return:

*C corp income = rental payments
*C corp expenses = mortgage pmts, property tax pmts, HOA, repairs, + whatever I pay the property owner (myself) (which would leave the property management fee as the only real income).

I send a report to the owner of the properties (myself) with all the income and expenses (including the management fee that was earned) itemized for each property.

For personal income tax return:

Report everything on schedule E just the same as if I didn’t have a property manager (the only difference is now there is a prop. manager fee). Meaning:

*Rental income = full rental payment of the tenants (not just the portion that I got from the property management company?)
*Rental expenses = all those expenses my c-corp paid (as if I paid them) + prop. mgmt fee.
*Depreciation as usual.

As a secondary question, if there were many repairs on the properties and there are more expenses than rental income, does the C-corp just report a loss on its report to me as the owner? So the c corp would actually make money on management fee while I’m losing money on the rental for the year. Or should C corp would just not charge the management fee (which would sound fishy for the whole pierce the corporate veil thing).

Is this correct?

Thank you,

Katerina

import · March 31, 2011, 1:40pm

P.S. just found conflicting info - Posted by Katerina

Posted by Katerina on March 31, 2011 at 13:40:58:

I was just researching this online and found advice to only report the property management fee on the C corp taxes and not the full rental income and expenses.

So which is correct?

Thank you,

Katerina

import · April 4, 2011, 3:55pm

Re: P.S. just found conflicting info - Posted by John Hyre

Posted by John Hyre on April 04, 2011 at 15:55:10:

First, I question whether the benefit of the management company is worth the costs, which include time and hassle. For the arrangement to be viable, you absolutely have to run the management company as if it were a REAL management company and its client a totally unrelated third party. That implies no small amount of paperwork, including the same set of books twice over - once when the management company records all transactions and creates a report/reconciliation for the client, and again when the client/property owner records everything on its books.

What’s the benefit? Well, if you/your spouse are personally performing the management duties (typical if you are the management company’s only employee’s/contractors performing management tasks), then you can still be personally sued the majority of the time. In a minority of cases, the courts will only allow the company to be sued, even if you personally performed/failed to perform the acts that led to negligence, etc. In short: Entities do a great job of protecting you from the actions of others (partner, employee, contractor, etc), sometimes protect themselves from you (e.g. LLC with charging order) and a lousy job of protecting you from you.

Throw tax issues into the mix: Depending on C-Corporation’s bracket, income in it may be taxed at a higher rate than rents that would have passed through to you. Second, if you have a passive loss problem, payment of management fees to the management company will make the rental loss, and the resulting passive loss issue, worse.

My rule of thumb (exceptions can apply): If you and your spouse are the people “doing the work”, the small benefit of management company does not justify the hassle. If others are doing the actual management work, then a management company (yours or someone else’s) is a must.

Assuming that this company is justified and treated as a true third party (meaning it does not pay for direct property-related expenses that are not reimbursed to it), only the management fees are reported as income, less expenses that are not reimbursed by the client/property owner. The property owner would report rents, less expenses that it paid for, including management fees paid to management company.

John Hyre