Owning investment real estate is fun…..until the rules come to bite you. To protect yourself from the beginning, make sure you have a strong reference point for what those rules are.
Tammy, an investor who owned just a few properties recently shared some stories with me- how it didn’t take many properties before some issues arose for her.
They included city inspection code violations, lack of collection hotel tax for a short term rental, and forgetting 1099s. These were easily remedied with some due diligence, so let’s dive into the top 5 compliance essentials for real estate investors to make sure you are protected.
1. Rental Inspections and Codes
Often times codes are the biggest complain for owners, but they are important to make sure they are addressed for tenant safety. Code requirements for different municipalities can vary widely based on their sophistication and the amount of rental housing in the market.
- Some cities, in an attempt to crack down on absentee landlords who neglect the property, have enacted stringent requirements.
- Lancaster city has grown in the depth of their inspection requirements.
- Cities like Harrisburg are continually adding to their regulations for property owners, but the process is clunky and time consuming while they learn how to streamline.
The best solution for owners is to learn the requirements and be prepared- which minimizes repeats visits by code inspectors.
Owners will also be prepared if they are cited for something un-necessary or discretionary, as your best protection is to learn the rules and play by them.
2. Hotel & Use/Occupancy Tax
If you own a short term rental, any stays under 30 days are usually subject to a hotel occupancy tax. Tammy had rented to many people she connected with on her social media channel, and had not put in place a system for collecting and remitting this tax.
- External sites like Airbnb and VRBO will collect and remit the tax, which they are required to do by law, but any owners taking direct bookings for stays less than 30 days should be careful to remain in compliance.
Use and Occupancy Tax is imposed on many businesses in many municipalities.
- If you operate your real estate business from a physical location, you may need to pay a use and occupancy tax.
- In some regions, like Philadelphia, the building owner may be on the hook if they do not pass this to their tenants, so be aware of the requirements for use and occupancy tax in your municipality if you own any property that is occupied by a business.
3. Recording Leases & Paying Lease Taxes
Some states have stipulations to record commercial leases to be enforceable, especially if they are longer in length.
- In the state of Maryland, Commercial leases longer then 7 years must follow this requirement to be enforced.
- Maryland and other states like Florida charge a sales tax on the value of the commercial lease, which can be significant, so overlooking these requirements can cost you dearly.
4. Sub Contractors Vs Employees
This is a big one.
While most investors are using contractors in the appropriate fashion, some skirt the rules to classify labor as Independent Contractors.
- Don’t be tempted to delude yourself into making an employee into an independent contractor. The ramifications of this if you are caught or reported can be significant.
- The other big bugaboo- not providing the 1099s! This can be a gigantic pain, but if you require the W-9 before paying them, and carefully file it away for tax season, this becomes easier later. QuickBooks and other accounting software have a great platform for tracking these.
5. Keeping the books!
Tammy told me her new motto: half of my job as an investor is just keeping the books and filing things correctly.
- While it may be less than half for some investors, and simplified by lots of amazing software out there, it does remain extremely important and hugely overlooked by many investors.
Tammy said thanks to the good bookkeeping skills she learned; she was able to stand up to an IRS audit successfully without a lot of stress- because she had documented.
Your future self will thank you for keeping careful records- or else hiring someone who loves this level of detail if it is not your mojo.
Conclusion
Since you are an investor- you are the ‘Doing’ type of person. Just make sure your doing includes key areas of compliance, to ensure your portfolio is sitting pretty and you can sleep well at night knowing you are audit proof.
Many investors we work with love to get things done, but also love to build for a lasting legacy for others around them. If you are looking to grow your portfolio the right way, reach out and let us know your investing goals, and we are happy to provide our advice along the way.
Sources
https://www.commenda.io/sales-tax/states-that-charge-sales-tax-on-rentals-and-leases
