Author Topic: do I need a rental business license?  (Read 2226 times)

sol

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do I need a rental business license?
« on: November 22, 2015, 11:35:31 PM »
My city has requested that I pay a $90 annual fee for a rental business license. 

When we rented out our former family home, I looked into the process of declaring it a business and quickly determined that renting your former primary residence did NOT qualify as a business, in the eyes of the IRS.  At the time I was actually hoping it would qualify as a business, for tax reasons, but some of you smart RE-types here quickly dissuaded me of that notion.

So if the IRS says I'm not allowed to be a business, why do I have to buy a business license?  What gives?  Is this just like bonus property taxes I get to pay because the house is rented instead of owner-occupied?

Does anyone else here pay an annual fee for a business license after renting out their primary residence?

Cathy

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Re: do I need a rental business license?
« Reply #1 on: November 23, 2015, 12:14:03 AM »
In the United States, the several states each "have broad authority to enact legislation for the public good", often called the "police power". Bond v. United States, 134 SCt 2077, 2086 (2014). "[T]he [state] legislature may forbid or restrict any business when it has a sufficient force of public opinion behind it", subject to express constitutional limitations and subject to federal preemption. Tyson & Brother v. Banton, 273 US 418, 446 (1927) (Holmes, J, dissenting), dissenting opinion approved by Olsen v. Nebraska ex rel. Western Reference & Bond Assn., Inc., 313 US 236, 247 (1941).

As the above authority illustrates, it is not controversial that states can regulate businesses.

For federal constitutional purposes, a city is basically an administrative agency of a state. A state can delegate its police power to a city. Hunter v. Pittsburgh, 207 US 161, 178 (1907) ("Municipal[ities] ... are ... convenient agencies for exercising such of the governmental powers of the State as may be entrusted to them."). It follows that a city can regulate businesses, if delegated such power by the state.

The question of whether your activities are within the scope of the city's licensing program will depend on municipal and state law. In particular, you would first analyse whether the city's bylaws require you to obtain a licence. Next, you would analyse whether or not those bylaws are intra vires the city (i.e. whether the state has actually delegated the city the power to enact those bylaws). Finally, you would analyse whether the state laws are unconstitutional or federally preempted (although neither of those is likely to be an issue on this topic).

Your post does not contain enough information to carry out any of these analytical steps, given that you don't disclose the city in question (and the factual description of your activities is pretty vague).

The Internal Revenue Code does not purport to be a comprehensive code of business regulation. The federal tax treatment of your activities is not necessarily predictive of how those activities are treated by state and municipal law.
« Last Edit: November 23, 2015, 12:19:29 AM by Cathy »

sol

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Re: do I need a rental business license?
« Reply #2 on: November 23, 2015, 12:29:14 AM »
The question of whether your activities are within the scope of the city's licensing program will depend on municipal and state law. In particular, you would first analyse whether the city's bylaws require you to obtain a licence.

According to their website, anybody who rents any real property in the city needs a rental business license.  No exceptions listed, including people who are not running a business.

Quote
(and the factual description of your activities is pretty vague).

I'm renting out one single family home that I used to live in.  I collect rent checks.  I go over and fix stuff if anything breaks.  We don't have an EIN.  We file a Schedule E, not a Schedule C, because the IRS told me my activities do not constitute a business. 

And that appears to be the crux.  The city sent me a letter saying a license was required for "all persons that engage in a rental business" and I blew it off because the IRS told me I'm not a rental business.  Then the city sent me a second letter saying "no really, you need to pay us or shit is going to get real" and claiming a license is required for "any person who rents out real property" without any mention of it being a business or not. 

Honestly I'd prefer it if I could make it a business.  I'd happily pay the annual fee to lower my tax burden, but I'm not keen on paying the city the business license fee and then having the IRS deny me business deductions.  Being a legal business provides a lot of opportunity for financial benefits not afforded to investment properties.
« Last Edit: November 23, 2015, 12:31:23 AM by sol »

Cathy

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Re: do I need a rental business license?
« Reply #3 on: November 23, 2015, 12:33:58 AM »
Subject to the constraints mentioned in the next sentence, the city is free to adopt its own definition of a business and it may not be the same definition used in other statutes (such as the Internal Revenue Code). It might be unfair, but you'll have to accept it unless you have an argument that the city regulatory program is ultra vires the city, unconstitutional, federally preempted, or otherwise illegal or unenforceable.
« Last Edit: November 23, 2015, 12:37:51 AM by Cathy »

Drifterrider

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Re: do I need a rental business license?
« Reply #4 on: November 23, 2015, 04:20:45 AM »
My city has requested that I pay a $90 annual fee for a rental business license. 

When we rented out our former family home, I looked into the process of declaring it a business and quickly determined that renting your former primary residence did NOT qualify as a business, in the eyes of the IRS.  At the time I was actually hoping it would qualify as a business, for tax reasons, but some of you smart RE-types here quickly dissuaded me of that notion.

So if the IRS says I'm not allowed to be a business, why do I have to buy a business license?  What gives?  Is this just like bonus property taxes I get to pay because the house is rented instead of owner-occupied?

Does anyone else here pay an annual fee for a business license after renting out their primary residence?

Because the city wants some of your money and can get away with it.

brooklynguy

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Re: do I need a rental business license?
« Reply #5 on: November 23, 2015, 07:41:36 AM »
I'd happily pay the annual fee to lower my tax burden

Well, I would expect the fee to be deductible against your rental income, so paying it very well may lower your tax burden (but I know that's not what you meant).  But at least tax deductibility should mitigate (albeit not completely offset) this annoying ding to your overall net worth.

dpfromva

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Re: do I need a rental business license?
« Reply #6 on: November 23, 2015, 11:49:51 AM »
Totally agree with C -- federal tax treatment and state/locality business regs are two different things. And with B -- fee can be deducted from rental income.

Educate me -- why would you prefer Schedule C, with its SE tax? Maybe you had big one-year repair/maintenance expenses and want to reduce current reportable income rather than carrying forward passive losses? The "real estate professional" or hours requirement for Schedule C is a big hurdle.

Can you position yourself as "materially participating" in managing the property ? Or is your AGI too high to take advantage of the $25,000 in expenses that would then be available to offset non-passive income? Even so, you can always carry forward those passive losses.