Reimbursing an owner for property management & labor

[KerryOn]

I own a single SFR rental house with two other people.  The two other people became part owners Jan 1, 2024.  I manage all off the property aspects... obtaining tenants, communications with tenants, processing financials & payments to owners, performing bi-annual inspections, etc.  I also perform labor & purchase materials for maintenance, repairs, cleaning & prep for transitions, as well as capital improvements (flooring/windows/ bathroom updates).   I want to set up a property management agreement with the other owners to be compensated for my work that would be allowable as a deduction on the rental tax return and also allow my labor to be included in the capital improvements for depreciation. My thoughts are as follows:

1. Create a Property Management Agreement (PMA) that specifies a % of rent to cover the basic monthly and transition property management.
2. Also, in the PMA include an hourly rate for labor for maintenance & repairs performed as well as some language for labor & materials for capital improvements.

Any of the payments I receive will be claimed as ordinary income, but as I  am retired, and not yet collecting any retirement payments, my "income" will be less than the standard deduction so I'll have no tax liability.

My questions are:

1.  Will this agreement allow us to deduct the expenses on our rental return?
2. Will this agreement allow us to capitalize my labor (& costs) involved in capital improvements?
3. There will be a loss on the rental in 2024 as it sat empty for many months due to work on the capital improvements & other reasons.  I'll have no income /tax liability in 2024, but in 2025 I have another property I plan to sell that will have a capital gain.  Will I be able to carry-forward the 2024 loss to offset the 2025 capital gains?

 Any suggestions or examples as to the content of a PMA are also welcomed!

Many thanks!

[Mike9241]

the first issue I see is that a partnership return needs to be filed, at least for the first year, for this rental activity. 

Domestic Partnerships
Except as provided below, every domestic partnership must file Form 1065, unless it neither receives income nor incurs any expenditures treated as deductions or credits for federal income tax purposes.

A qualifying syndicate, pool, joint venture, or similar organization may elect under section 761(a) not to be treated as a partnership for federal income tax purposes and won't be required to file Form 1065 except for the year of election. For details, see section 761(a) and 
Regulations section 1.761-2.

irc 761(a)Partnership

For purposes of this subtitle, the term “partnership” includes a syndicate, group, pool, joint venture, or other unincorporated organization through or by means of which any business, financial operation, or venture is carried on, and which is not, within the meaning of this title, a corporation or a trust or estate. Under regulations the Secretary may, at the election of all the members of an unincorporated organization, exclude such organization from the application of all or part of this subchapter, if it is availed of—
(1)for investment purposes only and not for the active conduct of a business,

te above raises an interesting issue because some taxpayers consider their rental real estate as qualifying for the Qualified Business Income deduction. if they take the QBI, aren't they saying they're engaged in a business that would then require the filing of a 1065 (except for a qualified joint venture)   

https://www.law.cornell.edu/cfr/text/26/1.761-2 

yes a PMA would work (not really required) but a written agreement is harder to challenge than word of mouth. however, realize that fees you are paid for repairs, maintenance, and capital improvements would be taxable income to you (reported on schedule C). against this you could deduct the costs involved in rendering these services. 

search the internet for an example of a PMA. you may also want a written partnership agreement. 

[KerryOn]

Thanks for yyour reply!

Some additional information:  I have run this rental for 18 years for my father who was a part owner with me.  My "payment" was an agreement of increased equity upon his death (Jan 1, 2024), where I would inherit a larger portion with my two sisters (the two other current "owners") inheriting the rest.  At the time he needed the income.  I did not.  So this arrangement seemed to work best for us both.  My sisters are not interested in carrying forward this arrangement... nor am I.  We never had to form a partnership... and this was with our taxes being done by a CPA tax accountant for 14 of those 18 years.   So I'm not worried about having to formalize a partnership... unless we'd need to do so in order to have a formal PMA.

[Carl]

You may want to seek legal advise from a tax pro or business pro on this.

I see one issue that "could" be major when it comes to taxes.
Any of the payments I receive will be claimed as ordinary income,

If you form a partnership or multi-member LLC, then all income received by all partner members is passive income. With this type of set up, a member can not be a W-2 employee of said partnership or multi-member LLC.
However, if you form an S-Corp, or file with the IRS an election to treat your partnership/multi-member LLC "like an S-Corp", then you "can" be a W-2 employee that earns what you call "ordinary income" that would be reported to you on a W-2. But this can be fraught will all kinds of issues; especially if your state taxes personal income.
As a partnership or Multi-Member LLC, the business would have to file a physically separate tax return using IRS Form 1065 and each member partner would be issued a 1065/K-1 for their personal 1040 tax returns.
As an S-Corp, the business would be required to file a physically separate tax return using IRS Form 1120-S. Again, each member would be issued an 1120-S/K-1 to report their income/losses on their personal 1040 tax returns. The S-Corp would also issue a W-2 to members who are also W-2 employees.
For those not versed in the laws that govern S-Corp operations, this can be overwhelming. For example, you have to deal with periodic tax withholding to the IRS as well as the state if your state taxes personal income. Then there's the UC fund payment your state may or may not require (Unemployment Compensation fund) along with other things.
I highly suggest and recommend you seek professional help from a local tax pro or business finance pro in your local area. Trying to do it yourself can "and will" be costly, as the IRS does not have much tolerance for mistakes and the penalties and fines for doing things wrong can be high.