Last week, I shared how I get a shock every April 15th by
the number of phone calls my office gets from the public
looking for help with filing an extension. This April 15th
didn't disappoint!
Several of the callers knew they needed a federal
extension, but they weren't always sure about the state
extension. Of course, the callers knew if they needed to
file an extension for the state they lived in, but my team
also asked them about other states and the response was
usually silence.
This part of April 15th does not shock me because I'm
constantly asking prospects and new clients about their
state tax obligations and the response is always
uncertainty.
More Than Just State Income Tax - State taxes usually come
in three forms:
Property tax
Sales tax
Income tax
Many business owners (and real estate investors!) get into
trouble by not even realizing they aren't complying with
the state tax laws. Here is a very common situation I see
time and time again.
A couple has been investing in rental real estate in their
home state for several years. They branch out and purchase
2 new rental properties in a neighboring state. The couple
knows they need to pay real estate taxes in the neighboring
state and that they need to file a state income tax return
in the neighboring state. The couple thinks they have
their state taxes covered.
Not so. Based on the above list, the couple has covered
the property tax and income tax, but not the sales tax.
And yes, many states have a sales tax on rental receipts.
This couple was in one of those states.
The Scariest Part of State Taxes - The scariest part of
state taxes is the huge accumulating expense that comes
with non-compliance.
With this couple, the 2 new properties were in a state that
had a 5% sales tax on rental receipts. The couple never
knew about it, so they never collected it from their
tenants. The state caught up with them 3 years later and
required them to file sales tax returns for the past 3
years.
Here's how it added up: The monthly rents for the 2
properties averaged $3,000. At 5%, the monthly sales tax
due was $150. This totaled to $1,800 every year, so for
the 3 years, the couple owed $5,400. And with penalties
and interest the grand total was over $6,500!
The nice thing about sales tax is it can be passed through
to your customer (or tenant), so you are allowed to collect
it from your customer and remit it to the state. But, if
you don't know you are suppose to collect it and don't
collect it, it doesn't mean you are off the hook. In this
situation, you have to come up with the money yourself.
This couple had an unexpected sales tax bill of over
$6,500. Fortunately, they had the funds to pay the bill
but it significantly hampered their ability to continue
their real estate investing as they planned.
The Solution - The solution for this couple is very simple.
Collect the sales tax from their tenants and remit it
timely. It can be an expensive lesson to learn and I see
too many people learn it the hard way.
----------------------------------------------------
I get a shock every April 15th by the number of phone calls
my office gets from the public looking for help with filing
an extension. This April 15th didn't disappoint!
http://www.provisionwealth.com
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