Allocation of General Rental Expenses

By Jason Watson, CPA
Posted Saturday, September 21, 2024

You might have general rental expenses that you want to allocate across all your rental properties. For example, a commercial umbrella policy might cost $1,500 in annual premiums. Do you allocate to each rental property? Usually Yes, and there are a handful of reasons why-

• If you want to assess each rental property’s profitability and return on investment, proper allocation is necessary.

• Lumping a bunch of general expenses to one rental property might skew your tax deductions and increase your audit rate risk.

• Not all rental properties are considered the same; some might be long-term, some might be short-term with an average guest stay of 7 days or less, one might be commercial, and another might be a vacation home. Different allocation methods might create some beneficial tax arbitrage depending on the type of rental activity (assuming the method is reasonable and consistent).

• You might have a triple net lease (NNN) where certain expenses are passed onto the tenants. While these expenses are typically directly and solely related to the singular rental property, you might have some general expenses that need an allocation. For example, you buy paint by the pallet since all your properties are painted with the same lovely yet boring colors including the office building.

Ok, now what? How much? There are five basic ways to allocate rental property expenses, and some might not be appropriate depending on the general expense-

• Gross rent

• Value

• Square footage

• Time spent

• Equally (same weight for each)

Back to our commercial umbrella policy. Do you allocate depending on the value of the rental properties? Or do you allocate based on risk assessment where a short-term rental has a lot more opportunity for injury and related problems (risk)? If the short-term rental is also one that is not limited by passive activity loss limits, then that could influence your allocation calculation provided you have a reasonable and consistent method.

There are several general expenses that you might need to spread across your rental properties and real estate investments. These include a work truck that is dedicated to your rentals, an employee that works directly for you and maintains all your properties, an attorney who is on retainer and handles all your real estate matters, a cell phone, bulk supplies such as paper towels or soap, tax return preparation fees, among other examples.

Home office allocation across all your rental properties poses some issues as well given loss limitations and lost expenses. See our home office deduction section.

Keep it simple of course, but also ensure each of your business units, and in this case your rental properties, are accurately reporting their expenses and subsequent tax deductions. While it might not change your ultimate tax footprint or consequence, it is good business stewardship and accounting. As we’ve mentioned throughout this book, your rental properties and real estate investments should be viewed with a business owner’s perspective.