Property Management???

[DaveinTexas]

I met with a new client that manages a few properties for a third party. The properties are owned by the third party who does not want to hassle with the upkeep, etc. The client collects the rents, pays the mortgage payment, insurance and prop taxes, and pays for all repairs/maintenance out of his business account and then distributes the "profit" to the third party.

I am trying to figure out how to classify the mortgage payment. The client is not legally responsible for the note, the property taxes or the insurance. Do you call this "property management fees" or "property handling fees"? How do other property managers handle their business?

TIA and Happy Father's Day gentlemen.

[erchess]

What sort of Entity is the client?

I would say that the client has ordinary income for Sch C or for 1120 or whatever he files.

[DaveinTexas]

Sole Proprietor

But can the client deduct the mortgage payment he is making on behalf of the third party? And if so, what would you call it?

[erchess]

I think

there are two ways this could be handled.

1. Put the the entire amount of rent received as gross income and take out all expenses including what is paid to the owner in their usual places on Sch C. Then the owner on Sch E puts down total rent paid by the tenants and deducts the management fee and the amounts paid by the manager in the appropriate places

2. Put as gross income only the difference between total rent and the amount passed on to the owner. This I would think leaves him relatively few expenses to claim but perhaps he has an office and the things that go with that and perhaps he buys cleaning supplies without billing the owner for them. He may have vehicle expenses. Anyway the Owner still reports on Sch E the total rent paid by the tenants and takes out the management fee and the expenses paid by the manager.

You didn't ask what the owner should be doing and of course if the owner is not also your client then what he or she does is immaterial to you. I just like to think through scenarios involving two or more taxpayers from the point of view of each in order to make sure my thinking is straight.

[DaveinTexas]

I like the first option

I suppose I can classify the mortgage paid by the client as property handling fees. I was wondering specifically what to call the mortgage payments paid by the client on behalf of the third party; I suppose I wasn't clear.

Thanks.

[KJ Judd]

Who is legally liable for the mortgage? Is the third party listed on the mortgage & title of the property? If so, the third party gets the deduction.

[FEDUKE404]

Caveat

I assume your client is not doing this for free. How does he determine his own income in the first place? Certainly he is not deducting what "belongs" to the owner, i.e. mortgage interest and property taxes. You mention he is paying maintenance et al out of his business account.

And then I would assume the property owner is still preparing a Sch E. What about the old "allowed or allowable" depreciation? That would seem to me to be at least a factor in the "profit" you mention.

Also, I can foresee a potential problem if there are any Forms 1098 involved.

Most "managers" I've dealt with perform similar services you name, for a fee, but the owner generally has some sort of separate arrangement for PITI payments that do not involve the manager.

If everything here is quite clean, the worker just files a Sch C and the owner a Sch E with the suitable "management expenses" shown as an expense. Overall I'm not sure if this is just awkward or approaching shady in nature.

[OtisMozzetti]

Depreciation deducted by the actual owner

The property manager isn't going to deduct any DEPRECIATION on the rental property or on any furnishings; that depreciation deduction goes to the actual owner of the property. Maybe the property manager will compute out the depreciation for the convenience of the third party actual owner who will claim it. In some cases, the third party actual owner may need to make sure to qualify as an active participant with the (residential?) rental property.

[S T]

Rental Property Mgr

How does a Property Manager report income and expenses?

It would seem that the Property Manager would have a Trust Account for the Third Party. The property manager collects rents on behalf of the Third Party (client/owner of the property), pays the expenses, and the Property Manager deducts his fee and then remits the balance to the Third Party Owner or requests additional funds from the Property Owner.

I have seen Property Managers issue 1099 forms to the Property Owner for rents which I would guess would be to balance out the Rent Collection. I have also seen year end reports that are issued to the Property Owner for income and expenses that the Property Manager has collected and paid.

What I can't determine is what income and expense the Property Manager reports on their own tax return.

Sandy

[DaveinTexas]

And thus the dilemma I am facing

I have never seen an arrangement where the property manager actually pays the mortgage when the property manager does not even own the property.

This does seem a little shady to me. Arrrgh!!! And why are we not permitted to charge contingency fees on original returns if we know the information reported will be disallowed in an audit? That's a joke.

I can't determine what to expense category the mortgage payment falls under for the property manager that does not own the property. Maybe it is considered a payment to the third party who owns the property and he should issue a 1099 for NEC.

I'm more confused now than ever.

[erchess]

I don't seee what is questionable here

The client receives ALL the income from the properties. He pays ALL the expenses out of that money, he pays himself, and he gives the balance to the property owner.

Contrary to what I said in my earlier post, I think he declares as income on Sch C or on the appropriate form for whatever Entity he may have only what he pays himself. If he has expenses of doing his work that he is not reimbursed for, he deducts them for tax and book purposes. If the mortgage company does not give the owner a 1098 then he must. The client must also give an itemized statement to the owner of total rent and each expenditure. The owner will put those on his Sch E page one.

I don't know....I don't have the best mind in the tax business which is why I sometimes post here what looks to some like silly questions. I also have better and worse moments and days in terms of what I can recall and how I can reason. But right at this moment I don't see the problem with this scenario. I do know one thing - if OP upon full reflection thinks the situation is shady then he should not take this client.

[Lion]

Whose Checkbook?

Is the manager depositing to owner's bank account and paying bills out of owner's checkbook? Getting them ready for signature or have signature authority or keeping a trust account on behalf of owner? Is there a trade organization for property managers that would explain the usual procedure? Otherwise, why not just Management Income and Management Expenses on manager's C? If he's managing for multiple owners, he could have Management Expenses - Westport, Management Expenses - Fairfield, etc.

[abby]

property management account

I did books for a property manager for quite awhile - the method Sandy mentioned is the normal method - a separate Client Trust account and monthly and annual statements to the owner of their income and expenses.

The property management books record the fees received for management and any expenses of running the prop mgmt office, employees, vehicle expenses, etc.

A couple of points: Most states have pretty tight regulations on anyone managing money for someone else. You may wish to check on any Client Trust Account laws in your state.

The mortgage is not any different than any other expense you pay for an owner - some owner's want to take care of that themselves, others prefer the property manager to do it. In Yardi - I believe it's still the prevelant property management software - would total the operating expenses, so the owner can analyze the profit of operation before mortgage and then the payment would be subtracted from the operating subtotal. Note I say the whole payment, not just the interest, as property managers don't usually track according to tax deductibility - they focus more on cash flow - I seldom see them separate out capital expenses, for example - although many will create a separate account for 'Improvements' so the tax preparer can ask for the detail of that account.

I don't think a property manager is responsible for a 1098, although I often had to ask lenders and note holders to issue one. They ARE, according to the IRS, responsible for a 1099-MISC for the total rents collected if someone else (a commercial tenant, say) hadn't issued them. We used to have to coordinate our 1099 with ones issued by others - can be quite an operation if you manage enough property and have section 8 tenants. This probably wouldn't be an issue in this circumstance.