Anyone pay local income taxes on rental income?

[johnhenry]

I've got a handful of SFHs in a small midwest city.  Got into the business quite by accident several years ago when I started renting my former residence after it didn't sell right away.  Wound up selling that one, but later started buying others with the intent of renting them.  In the last few years I've gotten into the business quickly.  My only regret (so far) is that I didn't start doing this at 20 instead of 30.

This past year I met with a tax accountant to do some tax planning (for the first time since I've been in the rental business).  He told me that (legally) I should be paying tax on the rental income to both the city and county in which I live.  He also reminded me that our city taxes gross income at 2%, while federal and state taxes are levied on net income.  As a tax preparer doing business in the city, in addition to doing taxes for businesses/individuals in the city, he self-reports his own income to the city and helps clients report theirs.

I think most investors in this forum know that rental income has some advantages over earned income which include a) not being subject to social security and medicare tax and b) deferral of tax by claiming depreciation (at least for federal and *my state).

But, I have to admit, I got into this business without calculating how it would affect my local tax liability.  And if my accountant is right, the impact could be consequential(though not major), and it would certainly not deter further investment of this type.  For example, if rental income gross was $40,000, that would be $800 just to the city, which is the same amount paid by someone with a $40,000 salary.  Of course the amount of taxable income for state and federal taxes would be lowered by deductible expenses and depreciation.

For the record, I think my accountant is wrong and I'm having him and others check into it to clear things up.  Without getting into too much detail, I *think* that my city tax applies only to "earned" gross income.

But, I am curious what other real estate investors on this forum have to say about how their local(city, county) tax liability is affected by their rental income.

[Cheddar Stacker]

I'm an accountant is St. Louis (although I'm in the county, not the city, so not subject to the city tax). We have a 1% city tax, but it is only on earned income. I have rental real estate in the city and I don't report it. We have many clients with rental real estate in the city and we don't report it. If it's not earned income, it's not subject to tax in St. Louis.

The return is specifically called an earnings tax report. If yours is called something similar, or the instructions imply it's only to be paid on earned income, I wouldn't pay any tax there. If your accountant is insistent on it, I would get a second opinion from another professional.

[johnhenry]

Thanks Cheddar. 

Here's an excerpt from the city website:
"The City ... levies an Occupational License Fee (employee payroll withholding tax, also known as payroll tax) of 2.0 percent as described and further amended in the Code of Ordinances.  This means that 2.0 percent of gross salaries, wages, commissions, and other compensation that is earned within the City limits should be remitted to the City"

I haven't yet dug into the Code of Ordinances, or gotten a response from the accountant.  But I think I'll wind up not paying any local tax on the rental income.

On a side note, we are nearly neighbors.  I'm about the same age and live a few hours from StL.  Make it there 2-3 times a year to see family and friends.  Have not seen many other midwesterners on this forum.  Let me know if you and others ever schedule a meetup in this neck of the woods.

[arebelspy]

I pay state taxes on my rental income (not here in Nevada, as we have no income tax, but on my rentals in other states).  Not city though.

[Blindsquirrel]

 Yeah, pay city taxes to  4 little burgs on  some of our rentals. Only 1.5-2% at present. The quarterly filing for a $20-35 tax bill a quarter is more of a pain in the ass than the cost. However, as in all things with the government, if you do not pay, a guy with a gun will come after you to get the money. 

[Cheddar Stacker]

Thanks Cheddar. 

On a side note, we are nearly neighbors.  I'm about the same age and live a few hours from StL.  Make it there 2-3 times a year to see family and friends.  Have not seen many other midwesterners on this forum.  Let me know if you and others ever schedule a meetup in this neck of the woods.

You're welcome. I thought you might be close due to the opening line of the post.

There are a lot of people from all over the world here, including the midwest. There are at least a dozen I can think of from St. Louis, although they don't seem to broadcast it much. I was busy and couldn't attend this meet up linked below, but I wouldn't be surprised if there's another sometime soon. This will also give you an idea of some of the other people from our neck of the woods.
http://forum.mrmoneymustache.com/meetups-and-social-events/st-louis-meetup-april-26-(sat-)-forest-park()/

[Nords]

For the record, I think my accountant is wrong and I'm having him and others check into it to clear things up.  Without getting into too much detail, I *think* that my city tax applies only to "earned" gross income.
But, I am curious what other real estate investors on this forum have to say about how their local(city, county) tax liability is affected by their rental income.

Well, you have to satisfy your doubts.  But good luck with that.

I don't think a government is particularly concerned whether your income is "earned" or "unearned"-- just on how it can be taxed to support their services & infrastructure.  The City & County of Honolulu (e.g., the island of Oahu) charges 4.5% excise tax on gross rental income.  The rest of the state charges 4%, but Oahu's extra 0.5% is to help pay for the new multi-billion dollar under-construction light rail system.

The "good" news is that our property taxes are relatively low.