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August 13, 2014
Looking to Rent Your Home During the 2015 U.S. Open Golf Tournament at Chambers Bay? You Might Want to Read This First.
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Hmm … fast, easy money renting your house for a few days to 2015 U.S. Open PGA visitors?  That is probably so, if you find a willing renter.  Every now and then, you might hear or see a story on the radio or television station about the gold at the end of the PGA rainbow.  Consider at one website, (http://www.eventhomes.com/2015/us-open-golf/rental/6738 (last view on 8/13/2014)), homeowners hope to receive $1,800 to $20,000 in rent per day.

The money is attractive to be sure.  But keep in mind that you could be viewed as a hotel for Washington State tax purposes, and the tax, interest and penalties can be a surprise if you don’t understand how the rules work.  Here is the easy part: If you personally rent your home to a tenant, and you rent no more than twice in a one year period, then you have no tax compliance issues.  And the harder part is?  If you hire a property manager, then the taxes do apply even if there is only one rental for the year.  Using a property manager is most likely how most homeowners will choose to market their homes. 

To put the tax liability in perspective, as a business, there will be a business and occupation (B&O) tax on the gross receipts at the rate of .471%.  (Although Lakewood and University Place do not impose B&O taxes, DuPont, Ruston and Tacoma do impose B&O taxes and may apply then in the case of these rentals.  Cities and the state do not work together with respect to the B&O taxes, so regardless of what the state may say about paying taxes, you need to check with these cities’ tax administrators to understand their requirements, if any.)  Next, a transient rental lasting less than 30 days is subject to sales tax (a rental for more than 30 days is exempt).  In University Place, the state and local sales tax rate is currently 9.4%.  The rental will also be subject to a special hotel/motel tax of 2%. 

Let’s look at an example.  Assume that you successfully rent your home for $1,800 per day for five days.  You earned a tidy sum of $9,000.  With the retailing B&O tax, you would owe $42.  The sales tax that you would collect from your renter would be $846 and the special hotel/motel tax that is also collected from the renter would be $180.  You would collect $9,000 in rent, $846 in sales tax and $180 in special hotel/motel tax.  The total sum that you would remit to the state is $1, 068, consisting of $42 for the B&O tax, $846 for the sales tax and $180 for the special hotel/motel tax.  Because the sales tax and the special hotel/motel tax are collected from the renter, only the B&O tax reduces your profit.  That is a tidy $8,058 profit after state B&O taxes are paid.  There will be other costs that will reduce the profit such as federal income taxes and the fee for the property manager, but still, not a bad profit for five days. 

Under the state tax rules, the property manager is most likely already registered with the state as a business.  That means that the property manager must collect and remit the taxes on your behalf.  If done correctly, the property manager will provide you a check for $8,058 less the manager’s fee.  However, what if the property manager does not live up to these obligations?   For example, it fails to collect the taxes from the renter?  Worse yet, what if the manager disappears with your money and the collected taxes?  You could be on the hook to the state for the taxes that your manager should have paid to the state on your behalf. 

Let’s assume the worst case scenario in that the manager disappeared with your money.  There is no doubt that the state will pursue that manager.  But, as the state points out, the manager and the homeowner are equally at risk.  If the state cannot find satisfaction with that manager, it will surely pursue the homeowner.  What would your state and local tax liability look like if that happened?  If you are not registered, there’s a five percent penalty for being unregistered.  If you did not remit the B&O, sales and special hotel/motel taxes on time, then there is interest (though it’s currently a bargain at 2% per annum, simple interest) that will be charged.  If your tax is substantially underpaid, then the penalty range is 5% to 25% depending upon how long the tax remains unpaid.  A tax is substantially underpaid if you have paid less than 80% of the amount due.   Because none of the tax was paid, then 100% of your total liability was not paid, and the penalty will clearly apply.  To make matters more expensive, if you do not pay the bill on time, there is another ten percent late penalty charge.  Add another ten percent if the assessment results in a tax warrant.

In all likelihood, by the time the Washington Department of Revenue audits you, many months, maybe even years will have expired.   (The normal statute of limitations is four years but if you are unregistered, the period is seven years.)  If you are audited, there will be a 5% penalty of the tax owed at a minimum for being unregistered.  With our example, generating $1,068 of tax liability, that would be $53.  You owe tax and the unregistered taxpayer penalty for a total of $1,122.  If you substantially underpay your tax liability, which would have done because you paid nothing, then there is another 5% penalty of $53.  Now you owe the state $1,175.  Remember, your property manager disappeared with your money, so this money comes out of your kid’s college fund.

Let’s say it takes two years for the Department of Revenue to find and audit you.  The interest at 2% per year would be about $43, increasing your debt to the state to $1,218.  If you don’t pay that amount by its due date, the substantial underpayment penalty increases to 15%.  The substantial underpayment penalty increases from $53 to $160.  In that event, you are now out of pocket $1,325.

If you did not pay the tax, interest and penalties by the due date, there is 10% late payment penalty.  That is another $107.  Now you are out of pocket $1,432.  If you fail to pay on the sixtieth day, and the substantial underpayment penalty increases to 25%, there’s another $267.  Now you are out of pocket $1,538.  So, at the end of the process, you don’t have the $9,000 and you went backwards by $1,538 as this is the amount you would have paid to the state.  (If you had a $20,000 per day rental, the debt would grow by about 11 times, making the debt closer to $17,000.)

I know what you are thinking.  You didn’t steal the money and you didn’t cheat the state; you’re a victim here.  All true.  Unfortunately, the law provides no exemptions for victims.  The moral of this story is to go ahead and take advantage of the temporarily high rental market for the 2015 U.S. Open.  But you should keep in mind that the benefits and burdens may come down to how you go about renting your home.  If you handle the rental without a manager and deal directly with the tenant, then you will pocket $9,000 (less federal taxes) and the tenant will not be required to pay the sales or the special hotel/motel tax.  If you hire a reliable property manager, then you’ll pocket $8,058 (less management fees and federal taxes).  If you hire an unreliable property manager, then you may pocket $0 and could actually owe the state money out of your pocket. 

For more information from the Washington Department of Revenue, visit this link.

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This advisory is a publication of Eisenhower Carlson PLLC. Our purpose in publishing this advisory is to inform our clients and friends of recent legal developments. It is not intended, nor should it be used, as a substitute for specific legal advice as legal counsel may only be given in response to inquiries regarding particular situations.

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