It’s an industry norm that property managers often (usually?) get reduced rent as part of their compensation. I was suspicious there was some interesting employer tax deduction here, as is the case with many industrial employee benefits. After becoming a landlord myself and conducting research as part of an apartment complex purchase, it turns out that no, there isn’t really a good deduction here.
Part of my interest in real estate comes from the appeal of living without a mortgage. Prior to engaging real estate, lodging expenses were my larges expense. My goal has been to get to a place where I make money from the properties I own. Towards this goal, it seems that self-employing as a property manager with reduced rent is a far suboptimal strategy. This article talks through one better approach, but there are several.
For the property manager, reduced rent is not federally taxed if certain conditions are met, but it may still be taxed at the state level. Some other interesting situations like on-site faculty at a university may qualify for special tax treatment. In cases where the property manager’s reduced rent will be taxed as income, a strictly better benefit would be a higher salary. In cases where the property manager’s reduced rent is not taxed as income, ordinary rent with a higher salary may still be preferred. Also, note that in some states there is an apartment size at which an on-site property manager becomes a legal requirement.
My wife and I would prefer to live off-premises in order to reduce our management workload. That is, even if we could obtain some tax-free rent reduction, it wouldn’t be enough money to motivate us to take on the actual workload involved in active management. We both have full-time jobs and a number of other things going on. Instead, we would prefer to pay for a property management company. Since this is an expense, it clearly tax-deductible from the employer standpoint, and it doesn’t seem to carry the same variance across states.
If we don’t reduce our own rent, aren’t we stuck with the original problem of housing expense? Yes, pretty much. We could occupy a unit in our complex and pay ordinary rent, which would carry a relatively small benefit in that it would reduce our occupant turnover and vacancy rate, but the reductions would be quite small and the benefits provided by owning our own home could easily outweigh those benefits.
Overall, it seems like owning our own home which is fully apart from the complex is the best strategy in terms of overall utility for my family. There may be some money left on the table, but it would be money paid for suffering an undesirable lifestyle. That is, it is money I would happily pay in order to reduce active management workload and suffer reduced housing options.
It is still possible to live without carrying a net lodging expense, of course, I just need to make sure the apartment complex cashflows at a rate which covers my primary residence inclusive of taxes. I still see big benefits from house hacking or using a home office deduction, though.