Real Estate Investor Asks about Property Management Fees to Self

We received a question regarding an LLC (limited liability company) that had multiple members. It had the default tax treatment, which meant it was taxed as a partnership. The LLC owned a number of properties. The partnership tax treatment was perfect for this particular circumstance.

One of the owners (members) did all of the work for the properties. The LLC needed to find a way to fairly compensate her for her work. Her questions asked about whether she should set up a property management company to handle the work she did or whether it made more sense to take out a guaranteed payment from the LLC. And then, how did those work? Were they deductions to the LLC and how was it reported?

From the LLC’s point of view, either way works. If the owner did all the work (we’ll call her Sue) was paid an agreed-upon amount of $1,000 per month, or $12,000, it could be written as a property management fee or as a guaranteed payment.

If it’s a property management fee, the LLC will get the deduction and will need to issue a Form 1099-MISC showing the total amount paid to Sue that year. If it’s a guaranteed payment, the LLC will get a deduction for the amount and will then show the payment on Sue’s K-1.

The property management fee would be subject to self-employment tax (15.3% of the net income from the business) and Sue could take expenses against the income. For example, she may deduct a home office, cell phone, computer charges, ISP and the like against the income. The self-employment tax is figured based on the net after expenses. Income tax is based on that amount as well.

In the case of a guaranteed payment, Sue will pay self-employment tax, but not get to take advantage of the deductions.

For Sue, there is an advantage to being paid as a property manager provided she has deductions. There’s a little bit more to account for, so it’s not as easy.