What expense category is Property Management Fees?

For businesses that own rental properties, hiring a professional property management company is a common way to handle the day-to-day operations, from collecting rent and screening tenants to coordinating maintenance. The fees paid for these comprehensive services are a necessary cost of managing your real estate investment.

The IRS considers these fees a fully deductible business expense. However, it's essential for accountants and property owners to know where to report them, as the correct tax form depends on whether you are considered a real estate dealer or an investor. This guide will clarify how to categorize property management fees to ensure you remain compliant.

Property Management Fees Category

The fees you pay to a property management company are an ordinary and necessary business expense related to your rental activity. These costs are best categorized as Management Fees or Legal and Professional Fees.

How you report these fees depends on your business classification:

• For Real Estate Dealers: IRS Publication 334 states that if you are a real estate dealer (in the business of selling real estate), you report rental income and expenses, including management fees, on Schedule C (Form 1040).
• For Other Property Owners/Investors: If you are not a real estate dealer, you report rental income and expenses on Schedule E (Form 1040).

Important Considerations When Classifying Property Management Fees

The most critical factor in handling these costs is distinguishing between your status as a real estate dealer versus an investor, as this determines which tax form you use.

Real Estate Dealer vs. Investor

• Dealer: Publication 334 defines a real estate dealer as someone engaged in the business of selling real estate to customers with the purpose of making a profit from those sales. For a dealer, rental activities are part of their main business reported on Schedule C.
• Investor: If you hold real estate for rental income and are not in the business of selling it, you are an investor. Your rental activities are reported on Schedule E.

Separating Management Fees from Other Expenses

It is important to track property management fees separately from other rental expenses like repairs, insurance, or property taxes. Your property management statement should provide a clear breakdown of the fees charged for their services versus any costs they paid on your behalf (like repair costs, which would be deducted under Repairs).

Tax Implications and Recordkeeping

To deduct your property management fees, you must report them on the correct form and maintain proper documentation.

How to Report the Deduction

• On Schedule C (for dealers): Management fees can be included on Line 17, Legal and professional services, or on Line 27a, Other expenses, with a clear description.
• On Schedule E (for investors): Management fees are reported on Line 10, Management fees.

What Records to Keep

You must have documentary evidence to substantiate the fees you paid. Your records should include:

• The property management agreement.
• Monthly or periodic statements from the property management company detailing the fees charged.
• Proof of payment, such as canceled checks or bank statements.

How Fyle Can Automate Tracking for Property Management Fees

Fyle simplifies the management of all your property-related expenses, providing a clear record for each property you own.

• Centralize Invoices: Have your property management company email their monthly statements to be forwarded directly to Fyle for automatic data capture.
• Track by Property: Code each management fee and related repair cost to a specific property address for precise cost allocation.
• Create a Clear Audit Trail: Fyle keeps the management agreement, monthly statements, and proof of payment together in one digital record.
• Automate Your Accounting: Sync categorized management fees and other rental expenses to the correct GL accounts in QuickBooks, Xero, NetSuite, or Sage Intacct.