Author Topic: Ahhh, yes, the city wants me to license my rental and tax my income as well...  (Read 6030 times)

Bearded Man

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City of Tacoma WA recently sent out notices to land lords threatening to slap them with back taxes if they do not pay the annual fee and taxes on their rental income.

So basically, the feds tax you and in most states the state does too, then the city wants a piece as well.

Meanwhile my section 8 neighbors at another rental party, drink and bbq all day, several times a week, while I and others like me go to work every day to pay for it.

Makes me want to sell and buy a house elsewhere with the proceeds.

zephyr911

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City of Tacoma WA recently sent out notices to land lords threatening to slap them with back taxes if they do not pay the annual fee and taxes on their rental income.

So basically, the feds tax you and in most states the state does too, then the city wants a piece as well.
It's common in many cities. Is the amount in question a substantial percentage of your earnings from said property?
Quote
Makes me want to sell and buy a house elsewhere with the proceeds.
It's always a valid option. God Bless America!

Bearded Man

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City of Tacoma WA recently sent out notices to land lords threatening to slap them with back taxes if they do not pay the annual fee and taxes on their rental income.

So basically, the feds tax you and in most states the state does too, then the city wants a piece as well.
It's common in many cities. Is the amount in question a substantial percentage of your earnings from said property?
Quote
Makes me want to sell and buy a house elsewhere with the proceeds.
It's always a valid option. God Bless America!

Not currently, though the license fee is more expensive if I make just a few hundred dollars more. I think there may be a different tax rate too, have to check. Currently it's just $25 owed per year for the license and then I think a 4% tax on the GROSS rent. It is about $500 a year in tax and license fees., so it eats $50 a month into my profits. Trouble is, I can't pass that on, otherwise the rent will be too high.

I could just sell (it's within the 2 years ownership, 3 years rental period) either outright or with a 10-31 exchange to avoid depreciation recapture (maybe 5K at best) and buy a house across the Narrows bridge paid in cash with half the proceeds, then probably buy another paid in cash with the proceeds in the same area. Commute is fine for me, not so great for my gf, but her job pays retail wages for a commute to the big city...not worth it.

Nice thing is, that would actually add to my FI situation, and I could let the other house that I have under contract in an HOA go and still have about 150K in cash, live in a paid off house again (which increases my savings rate), and have a paid off rental along with two mortgaged rentals.

I already own one house in an HOA, and would rather not own another one, though I didn't come to that decision until long after I signed the paper work for the short sale purchase; they seem to be useless and don't actually enforce anything in the by-laws other than MAYBE what color you paint your house.

Another Reader

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Four percent???  I think the landlords in Tacoma need a coalition and a lobbyist.

In Arizona, rents are subject to sales tax in most cities.  Sales tax on rentals is one to two percent, depending on the City.  The tenant pays the landlord or property manager who then in turn files a rental sales tax return with the City.  Now the state is taking over and will be the single collector.  Not the AZDOR agency's idea and not enough of a budget to do the job.  Lots of problems already. 

Reading through all your postings, my suggestion would be to get more focused and develop a long range plan.  Snap decisions to sell or buy are expensive and interfere with developing a stable productive portfolio.  Goals are nice, but a written plan with milestones will get you where you are going.  Modify the plan as needed after extensive consideration, but follow the basic plan.

Bearded Man

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True, part of the thing is right now I am itching to move to the country or retire or even both. I'm looking at 120K BRAND NEW 3bed/2ba homes in St. Augustine Florida on Zillow, and thinking, I love the weather, I have all this money, why don't I do it?

I need to research it more. In fact I was looking in Ocala before but found out central FL is the center of the sink hole universe. Hence why I'm looking further north.

I could cash out and buy a primary residence paid for, and 3 new construction rentals paid for and call it good. Or I can 10-31 exchange my existing rentals (though I'm still within the window to sell without capital gains, but the 10-31 prevents depreciation recapture as well) for properties in the area and keep working for another 6.5 years in an attempt to get close to 2 million. Right now between a new high stress job, grad school and dealing with existing rentals I'm really feeling down and getting...tired of modern living.

I think at the least I need to finish the next two years at this job to stack close to 200K savings in addition to current savings, let real estate appreciate more and get my MBA so that I have options, especially if I want to return to the workforce...

Candace

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What are the true chances of being affected by a sinkhole? I would do a little research on this and run actual numbers before ruling out Ocala. I've been there, and from reading your other posts, it sounds to me like exactly the type of place you're looking for.

Bearded Man

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Travolta has a house there and two huge jets he parks right at his house, but he also has a ton of money, for all we know he surveyed or had it surveyed.

Yeah, Ocala, or Dunnellon, I heard utilities are cut in half when you are not on the Ocala system. But the sink holes. I've done some research on it and just learning the entire state was underwater for millions of years and is built on limestone, and that central FL has more sink holes than anywhere else on Earth, I just think it's something worth taking into consideration. There are other places like St Augustine that I've heard great things about and it looks like it is dirt cheap compared to here.

NoNonsenseLandlord

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In the long run, this will be good for you as it limits others from getting in the business.

I'm a red panda

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Don't most cities require licenses and tax people running businesses in their city?  A rental property is a business.

I don't understand the issue at all.

Crushtheturtle

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Don't most cities require licenses and tax people running businesses in their city?  A rental property is a business.

I don't understand the issue at all.

Some folks see real estate as another avenue to a passive income stream. Additional taxes and fees reduce income and therefore cash flow. Imagine if the passive index cash flow was subject to the same fees and taxes- there would be much weeping and gnashing of teeth.

Candace

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Don't most cities require licenses and tax people running businesses in their city?  A rental property is a business.

I don't understand the issue at all.

Some folks see real estate as another avenue to a passive income stream. Additional taxes and fees reduce income and therefore cash flow. Imagine if the passive index cash flow was subject to the same fees and taxes- there would be much weeping and gnashing of teeth.

Rental properties may be an avenue to a passive income stream under some circumstances, but operating the properties is a business. Simple. Owning an index fund is not a business; it's investing in other peoples' businesses. Also simple. So comparing the two in this way is not valid.

Like it or not, many cities require licenses and tax on businesses. I had to pay these myself when I operated a business. Did I like it? No. But it's how our system is set up.

However, I think the OP was especially annoyed at the high rate the city wanted - perhaps it was 6%? That seems high.

Fishingmn

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I'm on the City of Tacoma webpage - https://www.cityoftacoma.org/government/city_departments/finance/tax_and_license/rental_business_license

I don't see any mention of a 4% tax on gross rents. Only the cost of the license -

What is the business license fee?
Annual gross rental income of $12,000 or greater the license fee is $90 annually.  Annual gross rental income less than $12,000, an annual $25 fee is required.  Gross income is defined as total rent received, including rent from Section 8.

Bearded Man

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It wasn't on that page, I did read it somewhere though, probably in the municipal code, but I think it was mentioned as a B/O tax, though this document states I am exempt from taxes on rental property.

http://cms.cityoftacoma.org/taxLicense/Tacoma%20Tax%20Sheet%20-%205-8-13.pdf

zoltani

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IME dealing with municipalities you will need to call and talk with someone and explain to them why you are exempt. I have had pierce county try to hold me to things when the actual law shows that I am exempt. It sometimes takes a few calls and a lot of push back, but you may get your way.

I also live in Tacoma. A bit OT, but how do you like it for a city to be a landlord in? I missed out on a great 8 unit building for 320k back in 2012...doh...
My rentals are in tennessee, where it is very landlord friendly, and I have no experience with west coast cities which seem to be more tenant friendly.

Bearded Man

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IME dealing with municipalities you will need to call and talk with someone and explain to them why you are exempt. I have had pierce county try to hold me to things when the actual law shows that I am exempt. It sometimes takes a few calls and a lot of push back, but you may get your way.

I also live in Tacoma. A bit OT, but how do you like it for a city to be a landlord in? I missed out on a great 8 unit building for 320k back in 2012...doh...
My rentals are in tennessee, where it is very landlord friendly, and I have no experience with west coast cities which seem to be more tenant friendly.

Well, other than this license that I have to pay for every year, it's not bad. Rents have risen steadily and I have no issues finding tenants. This is my first vacancy and the first two people I showed it two wanted it, and I picked the more favorable credit history and income of the two. Unit is rented/spoken for before the other tenant even moves out. I do charge below market rents though, at this and other properties, as carrying costs of vacancy and turnover are not worth the hassle of high a rent.

I especially love the property because it is convenient to everything, and I'd need about 300K in index funds to produce the same amount of cash flow. A property I paid a fraction of that for during the downturn. That 8 unit would have been a steal at that price, you can't even get a 4 unit in the ghettos of the east side for that price now.

 Gotta love it as an investment. Living in it it reduces my cost of living via no mortgage or rent, chickens and a garden, clothes line, walk score, etc. Renting it out makes me a good chunk of passive income. And all the while the house has more than doubled in value.

clifp

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Four percent???  I think the landlords in Tacoma need a coalition and a lobbyist.

In Arizona, rents are subject to sales tax in most cities.  Sales tax on rentals is one to two percent, depending on the City.  The tenant pays the landlord or property manager who then in turn files a rental sales tax return with the City.  Now the state is taking over and will be the single collector.  Not the AZDOR agency's idea and not enough of a budget to do the job.  Lots of problems already. 


Be glad you don't live in Honolulu.   The tax is 4.5% of your gross rent,unless your rent for less than 180 days (e.g. AirBnB) in which case you owe the 4.5%+ 7.5% transient tax or 12%.

Bearded Man

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WHEN it gets to that point, I will cash out JUST to keep the money out of the entitled peoples hands, lest they "spread the wealth" that I worked for while the lazy bums got paid to have kids, drink and play PS3 all day.

Blindsquirrel

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 It is a cost of business, all government entities want money. Most of them want as much money as they can get their grubby mitts on, while making it a pain in the rear to pay and a felony if you screw up.  See IRS rules for a good example. If it is worth the cost from a ROI perspective, pay it and deal. (By pay it I mean charge your tenants for it FYI.) If not, get out of the business. Holding properties in a LLC or corporation can insulate you from BS criminal charges.

grantmeaname

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It's a felony if you unintentionally misstate your federal tax liability? There's an eye-roller!

Doubleh

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I'm genuinely interested in this as my wife owns rental property in Tacoma, and while we pay the licence fee of something like $100 per year, this was the first I'd heard mention of a City tax. Looking on the Tacoma website the most up to date guidance I can find is this:

http://cms.cityoftacoma.org/taxLicense/Tacoma%20Tax%20Sheet%20-%205-8-13.pdf

This is dated 2013 but shows there are exemptions (right hand box on P3) for "sale, lease or rental of real estate", and additionally for any business with gross receipts of less than $250,000. Commission received as a real estate broker is not included in the real estate exemption, but sounds like you would still be covered by the general exemption if below $250,000. Even if you did exceed that, the rate of tax is 0.004, which I read as 0.4% rather than 4% although I'm happy to be corrected if this is some strange US reporting convention.

Overall this sounds to me like city tax is a non-issue for rental property but I'm very keen to hear if you have more recent information that overrides this as we are out of the country so may have missed something.