Top Things Your CPA Thinks a Great Property Manager Should Know

Have you ever wondered what makes a great property manager?  Aside from their winning personality, ability to manage and lease-up properties, they should understand that at the end of the day, their efforts are going to end up on a tax return.  Here are some tips from our real-estate savvy tax accountants to help make their efforts even more valuable.

The best property managers need to provide excellent service- both to the investor/owner and to the tenants they manage. Moreover, a great property manager needs to be knowledgeable about the rental markets in which they deal and its legal environment, including: landlord & tenant rights and responsibilities, and the financial impacts (including tax implications) that their day-to-day decisions have on the property and ultimately its investors.  When your property manager is “in the know” about the treatment of the items we list below, rest assured they can make decisions in all parties’ best interests, and also provide the best information possible to the accountants that may be translating all of their hard work into a tax return filing:

1)      Lease acquisition costs (aka lease commissions)

For tax purposes lease commissions must be capitalized and amortized over the length of the lease.  Exceptions include:

  • Where the term of the lease is less than one year, or
  • The term of the lease is month-to-month, or
  • Lease commissions that are less than $5000 per tenant.

In these three cases, the lease commissions can be deducted currently. 

Information your CPA/ tax preparer needs:

  • Total lease payments paid per tenant
  • The term of the lease
  • Possibly a copy of each lease or lease renewal signed during the year

But be careful of year-end cut-offs! When lease commissions related to one tenant are paid over 2 tax years, additional information might be necessary.  For example: total lease commission is $8,000 for a 5 year lease, but is paid 50% in December and the remaining half the following January.  Without knowing the total, the first half might have been improperly expensed since it was less than $5,000, when in fact the total of $8,000 needs to be capitalized and amortized over the lease term.

2)      Tenant deposits

Amounts paid for tenant deposits have different tax treatments depending on the type of deposit.

A)     Non-refundable deposits need to be included as current income for tax purposes, even though these amounts may remain in the books as a liability until it is applied against the repairs, etc. when the tenant moves out.

B)      Refundable deposits are treated the same for book and tax purposes (i.e. they will be included in income only to the extent that an amount is not refunded to the tenant at the end of the lease).

C)      Any portion of a deposit that is earmarked as prepaid rent needs to be included currently for tax purposes.

Information your CPA/ tax preparer needs:

  • Is each tenant deposit refundable or non-refundable?
  • Is any portion of the deposit for the final month’s rent?

3)      Building and tenant improvements

Most non-residential building improvements are depreciated for tax purposes over 39 years (residential over 27.5 years).  Some commercial building improvements made pursuant to a lease may qualify for a shorter 15 year tax life.  Other asset additions may qualify for even shorter 5 or 7 year depreciable lives.

Information your CPA/ tax preparer needs:

  • detail of the type of improvement
  • the date the improvements were placed in service

Typically a contractor’s request for payment or contract agreement will provide breakout by type of work performed (i.e. electrical, HVAC, carpet, plumbing, etc.).  Based on this information a tax preparer may be able to carve out the shorter lived assets from those that would normally be capitalized using a higher 39 year tax life. 

All is not lost, however, if this level of detail is not available.  If the improvements are significant, a cost segregation study can be performed to determine shorter lived assets and accelerated depreciation deductions.

The other important piece of information needed is the placed in service date. Generally, tenant improvements should be placed in service when the space is ready and available for its intended use, even if the lease starts on an earlier date.  Property managers should be aware of how these dates can affect the tax preparation, especially if the improvements are complete and ready for use close to the end of the year (say December 15th), but the final payment for the work isn’t made until the following year.

We understand that managing properties is much more than just providing financial information to investors and their accountants at the end of the month or year.  It’s quite a juggling act to manage tenants, market, keep the property on budget, collect rent, pay expenses, handle maintenance and repairs requests, and much more.  With all of those things to do there is hardly time to keep up with all of the tax laws and changes.  It’s hard to be “in the know” about everything.  That’s why a great property manager will work collaboratively with a CPA or tax preparer to provide the necessary information and the best possible service.

For additional tips about what a Perkins CPA thinks “a Great Property Manager Should Know”, feel free to contact us. We’d be happy to share!