Can I pay my spouse to manage my rental property?

Forum|Forum|7 years ago
June 4, 2019
4 replies
13 views

My wife and I jointly own a duplex. She does most of the management work...advertises, reviews tenants, answers tenant's questions/issues, etc. Can I pay her a management fee and then deduct that from the rental income next year? Would it make a difference if I was sole owner of the renal property?

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If your wife also owns this rental property, then no, you cannot pay her to do this work.

If you owned this property separately and held it in a separate entity such as an LLC, you could pay her to manage this property but it's not a good idea. Paying her would only move this income from Schedule E to Wages and Income. You'd also have to pay FICA taxes or Self Employment Taxes on these amounts. It is not advantageous for you to do this.

Anonymous

Answer

If your wife also owns this rental property, then no, you cannot pay her to do this work.

ahsoka11

Level 2

Hi chelsie! I wanted to do this. My rentals are in llc so I wanted to pay myself with a 1099 from the rental so I can deduct self employed health insurance. What do you think

Anonymous

I've been thinking of doing this myself and having 100% of the proceeds go directly to a solo 401(k) for my stay at home spouse. The LLC (employer) matches my spouses contribution - both pretax - to reduce income on the Schedule E and reduce self-employed tax from the 1099. Not sure this is kosher or "self-dealing". So I need to look into this more.

Tdamjan

Level 2

What if I am sole owner of the property (purchased prior to getting married) and I don’t pay my wife directly but pay her through an incorporated property manager firm that employs her. Does it matter if she is the single employee or not?

Critter-3

Level 15

@Tdamjan

Your situation is not the same ... your Sch E rental legally pays a corporation to manage the rental property and that corporation legally employs your spouse and they file the proper payroll reports.

Carl

Level 11

My wife and I jointly own a duplex.

The bottom line answer is no, an owner can not pay themselves to manage rental property they own. Doing so makes no sense anyway. You collect rent, put it in your self pocket and pay taxes on that income. Then you pay yourself by removing the money from your left pocket, putting it in your right pocket and paying taxes on it *again* with the addition of social security and medicare tax. Not only is that going to raise flags at the IRS that will result in an audit, but it's also illegal.

Would it make a difference if I was sole owner of the renal property?

Then you could legally pay your wife a management fee that you would report by issuing here a 1099-MISC. But for that to be legal she would have to agree to file a quit claim deed on the property, and chances are the lender who holds the mortgage would not allow that, as it would be a direct violation of your loan agreement possibly resulting in an immediate foreclosure on the property.

Your wife would then report that income on SCH C as a part of your joint tax return. Then, in addition to paying taxes on it again with the social security and medicare tax, she would also pay an additional 15.6% self-employment tax.

So if you and your wife have no problems with paying more taxes, then by all means go for it, after getting written permission from the lender to remove your wife from the property ownership deed.

Tdamjan

Level 2

I think you misunderstood it. I bought the rental property prior to getting married, from my understanding I need to claim any rental income on this property in my own return and cannot income split with my wife. My wife doesn’t work and I want to get her to take on the management of this property and wonder if by incorporating and paying a firm (her firm) and she manages the property I can write off the expense reducing my tax owing and then her self employed firm would get taxed at a rate potentially lower than my current tax rate.

Anonymous

is there any reason you think you can't file a joint return with your spouse even though she has no income? it makes no difference that you acquired the property before you were married. a married couple can file a joint return but must report all their income on the one return. if you were to file as Married Filing Separate you would end up paying twice the income taxes than on a joint return. economically what you would like to do makes no sense and I agree with others that the IRS wouldn't buy it.

"incorporating and paying a firm (her firm) and she manages the property I can write off the expense reducing my tax owing and then her self employed firm would get taxed at a rate potentially lower than my current tax rate"

say a Corp. it would have to pay her a salary and it probably has to be almost as much as the management fees you paid it - after all you would be paying it for the services it performs and she is performing all the services. Between her and the corp they would pay 15.3 % in social security taxes + unemployment taxes. Since she would be an employee, in most states the corp would have to buy workmen's compensation insurance and if she uses a vehicle possibly higher insurance for that. To play it safe possibly liability insurance. Her salary would be included on your joint return (married filing separate would most like result in much higher combined taxes). the corp would have to pay federal and state income taxes assuming anything is left after expenses. Most states require Corporations to pay franchise taxes. The management fee you paid the corp would have to be reasonable (as I have said I don't think the IRS would buy this as legit which would cause you more tax problems). how much do you really think you could pay her? management duties should only take a few hours per week

Pyoo23

Level 2

Would this scenario make sense if you are taking advantage of depreciation to end up with a net passive loss on the rental property? Wouldnt this would allow the net passive losses offset total joint income? Whereas the losses otherwise would not be able to offset his income?

the spouse would also be able to deduct business expenses related to the property management work to reduce their net income?

ThomasM125

Level 15

@py0023 It is true that if you pay your spouse for work associated with a rental property that could increase passive losses, which may be desirable if you are trying to offset passive income elsewhere on your tax return.

Normally it would be OK to pay the salary, but you would have to have a legitimate reason for doing so, for instance to allow the individual to be covered for unemployment insurance or workmen's compensation. You couldn't do it to simply generate a tax advantage with regards to the passive loss deduction however.

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