Bad time to be a landlord

With the new legislation just signed into effect by the Obama adminstration, it is a bad time to be a landlord.  Consider this:

1)  Obama has added 3.8% to the tax on rental income.  Presumably, because if you own rental property, you are rich.  He wants to the target the rich.  He said so.

2)  Obama has increased the capital gains tax from 15% to 20%.  If you have a rental property, the government views it as an investment.  If you sell it for a profit, you are now paying 20% tax on those profits, instead of 15%.

As I think of creative ways to avoid, or at least minimize, the effect of these taxes on my bottom line, I am reminded of my prior run-ins with the government tax collector.

College.  When I first moved to Arizona, a friend assured me that people who made less than $12,000 a year did not have to pay tax in Arizona.  I assumed this also meant I did not need to file a return.  I always filed my federal return, but I did not file an AZ return my first three years in Arizona.  In my fourth year, I received a letter in the mail from the state of Arizona.  Apparently, one of the validations the state revenue department does every year is review the tax returns filed with the federal government by people who list their residence in Arizona.  They cross reference this information with the list of people who filed returns in the state of Arizona.  In my case, they learned I had not filed a state return - what I now know to be a violation of the law.  All said and done, my friend was right, I did not earn enough while in college to have to pay taxes.  However, because I had not filed, I still ended up owing over $1,000 in penalties and interest for failure to file.

Renting.  When I first started renting my home to strangers, I figured that all I needed to do was pay tax on my income and make adjustments to how I claimed the interest as a deduction on my tax returns.  I also learned that, because it became an investment property, I had to start treating it differently from an asset/investment perspective and amortize the value.  I did not realize that, once I started renting, I was now a business.  Not a very profitable business, but a business nonetheless.  Just like with my tax returns, it wasn't long before the local government made me aware of my obligation.  I received a letter in the mail from the city where I had my rental property.  Apparently, the cities look at two things:  first, if you are the listed owner on a property and the address listed on your tax refund is different, they assume the registered property is an investment, and that you are renting it.  Second, the cities review rental listing and compare them to the list of properties registered with the city.  If there is a listing they are not aware of, they send you a letter.  Once again, I found my ignorance of the law was no protection from it.  I had to pay my fee to obtain a license, not just for the year they discovered me, but back to the time I began renting the property.  Same thing for the sales tax I was supposed to be collecting on my revenue and wasn't - city wants to tax your revenue, state and feds want to tax your profits.  Add to that interest and penalties for failure to file, failure to collect, and failure to pay, and my total out of pocket expense after receiving that letter was several thousand dollars.

What have I learned from all this?  Always consult a professional before doing anything that involves money.  Don't assume you know everything.  The $200 it would have cost me to talk to a CPA or a Lawyer would have saved me $3,000.  Fair trade....if I had only known.