Can You Deduct Self-Management Fees by Creating a Property Management Company?
Real estate investors are always looking for ways to maximize returns while reducing their tax liability. One question that often comes up is whether landlords can set up their own property management company and then “pay themselves” management fees that they deduct as an expense on their rental properties.
At first glance, it seems like a clever strategy: move income from one pocket to another, reduce rental income for tax purposes, and potentially unlock additional deductions. But the IRS has strict rules on related-party transactions, and not all setups are created equal.
This article explores the pros and cons of deducting self-management fees through a separate entity — and what investors should know before trying it.
What Does “Deducting Self-Management Fees” Mean?
Normally, property management fees are deductible when paid to a third-party management company. But some investors wonder: What if I create my own LLC or corporation, call it a management company, and charge my rental properties fees?
Example: You own three rental properties personally or through separate LLCs. You then create “ABC Property Management, LLC,” which invoices your rental properties for management services. The rental entities deduct the fees on Schedule E, and ABC Property Management reports the income.
The idea is to shift taxable income between entities, and possibly capture additional deductions through the management company.
The Potential Pros of This Strategy
1. Formalizes the Business Structure
Setting up a management company can add legitimacy to your rental operations. You’ll have contracts, invoices, and clear separation of roles — which can look more professional to lenders, partners, and even the IRS if structured properly.
2. Creates Opportunities for Additional Deductions
A management company may open the door to deductions you might not otherwise take at the property level. For example:
Office expenses, supplies, and software
Business meals and travel for management purposes
Salaries paid to employees (or even family members, if legitimately working)
Retirement contributions for employees of the management company
These deductions could reduce the net taxable income in the management entity.
3. Allows for Income Splitting or Entity Optimization
If structured carefully, the management company could be taxed differently than your rental properties (e.g., an S-Corp instead of passive Schedule E reporting). This could allow:
Avoidance of passive activity loss limitations in certain cases
Potential self-employment tax planning
More flexibility in distributing income among partners
4. Facilitates Scaling Beyond Your Own Portfolio
A management company isn’t limited to just your properties. Once established, you could offer services to other landlords — creating a new income stream. What starts as a tax play could evolve into a separate business.
5. May Improve Record-Keeping and Liability Protection
Keeping property operations and management services under different entities can simplify accounting, clarify cash flows, and create an additional liability shield (though this depends on state law and corporate structure).
The Major Cons and Risks
1. IRS Scrutiny of Related-Party Transactions
The IRS is wary of paying yourself to manage your own property. If they determine the management fees are merely a scheme to shift income, they may disallow the deduction. Key risk factors include:
Lack of arm’s-length contracts
Inflated fees not in line with market rates
No actual services performed
In an audit, you must prove that your management company is legitimate, active, and provides real value.
2. You Don’t Actually Save Taxes — You Shift Them
Paying yourself doesn’t eliminate tax; it just moves it. If your rental entity deducts $10,000 in fees, your management company must recognize $10,000 in income. Unless the management company has offsetting expenses or favorable tax treatment, you may not come out ahead.
3. Possible Exposure to Self-Employment Tax
Rental income reported on Schedule E is generally not subject to self-employment tax. But if you route income through a management company — especially an S-Corp or sole proprietorship — it could trigger self-employment tax obligations that otherwise wouldn’t exist.
4. Increased Complexity and Compliance Costs
Forming and running a management company means:
Filing separate tax returns (Form 1120S, 1065, or Schedule C)
Drafting service contracts between entities
Paying state fees for the new LLC or corporation
Maintaining books, payroll, and potentially worker’s comp insurance
For small landlords, the added administrative burden may outweigh the tax benefits.
5. Risk of Double Taxation if Misstructured
If you form a C-Corporation as the management company, rental fees deducted on Schedule E flow into the corporation, where they may be taxed once at the corporate level and again when distributed as dividends. Without careful planning, this could increase, not decrease, your total tax bill.
Pros and Cons of Deducting Self-Management Fees
Evaluating the strategy of setting up your own property management company to charge rental properties.
| Factor | Potential Benefit | Potential Risk |
|---|---|---|
| Tax Deductions | Additional write-offs via management company | Income merely shifts; may increase self-employment tax |
| Professionalism | More formal business structure | More complexity and cost |
| IRS Audit Risk | Legitimate business may pass scrutiny | Self-dealing could lead to disallowed deductions |
| Scaling | Can serve outside clients | More compliance requirements |
| Liability | Possible separation of roles | Doesn’t eliminate landlord liability |
Key Considerations Before Setting Up a Management Company
1. Use Market-Rate Fees
If typical management fees in your market are 8–10% of rents, charging yourself 25% raises red flags. Always invoice at fair market value.
2. Provide Real Services
You must actually perform management tasks: tenant screening, bookkeeping, maintenance coordination, lease renewals, etc. The more you document these services, the stronger your case in an audit.
3. Keep Entities Separate
Maintain separate bank accounts, contracts, and accounting records. Treat the management company as a real business, not just a shell to move money.
4. Consider Professional Tax Advice
The rules around related-party transactions, passive activity losses, and entity taxation are complex. A CPA experienced in real estate can help determine whether this structure benefits you or creates more risk.
5. Run the Numbers
Before forming a management entity, build a pro forma. Ask:
How much income will shift into the management company?
What expenses will offset that income?
What is the net tax impact compared to leaving fees inside the rental property?
Example Scenario: When It Works vs. When It Doesn’t
Case A: Small-Scale Landlord
You own one rental property, grossing $18,000 annually. You create a management LLC and charge yourself $1,800 in fees. The deduction saves $500 in taxes, but the management company has no other expenses and now must file a separate return. Net result: minimal benefit, more cost and hassle.
Case B: Portfolio Investor
You own 12 rental units across multiple states. You establish “XYZ Management, LLC,” charging 8% of rents, or $14,400 annually. The management company employs a part-time assistant and purchases software, marketing, and travel expenses, reducing taxable income. You also begin offering services to other landlords, generating $20,000 more in revenue. Net result: legitimate business income with offsetting deductions and scalability potential.
Alternatives to Creating a Management Company
Deduct actual expenses as a landlord: Mileage, home office, supplies, and software are deductible without forming a new entity.
Elect real estate professional status: Allows losses to offset other income if you qualify.
Use cost segregation studies: Accelerated depreciation may create larger deductions than self-management fees.
Final Verdict
Setting up a property management company to deduct self-management fees can be legitimate in certain contexts — particularly for larger portfolios or when expanding into third-party management. But for small landlords, the strategy often creates more complexity than benefit.
The IRS scrutinizes related-party transactions, and unless you operate at arm’s length with real services and market-rate fees, deductions may be disallowed.
Bottom line: Treat a management company as a genuine business, not just a tax play. Otherwise, you may spend more time and money than you save in taxes.
