I've been renting but have not been licensed. What consequences should I expect?

You’ve been renting your property for a few years, and now you are taking steps to become legal and get licensed? Congratulations! Before you start the process, there are a few things that you should be aware of:

Fines & Penalties

As of this writing, when you try to obtain a Basic Business License, the Business Licensing Division of the Department of Consumer and Regulatory Affairs (DCRA) does not impose a penalty or a fine on unlicensed landlords when they are voluntarily obtaining a license. Instead, the Business License Division of the DCRA believes that when someone makes the choice to comply, it is best not to complicate matters further. So the good news is, there are no expensive fines right now! That said, keep in mind that the Government could change its policy at any time and without notice.

If you have received a notice from the DCRA informing you that they are aware of your unlicensed renting activity, you can expect that there might be a penalty.

Note: If you own a property with two or more units (not a condo or cooperative units), and you do not have a Certificate of Occupancy for that property, understand that your property is being administered by an office that has policies that are different from those of the Business Licensing Division. If you have rented the property without first obtaining a Certificate of Occupancy, you could be issued a Notice of Infraction, which carries a $1400 penalty. (From our experience, this penalty has not always been issued, except for cases where violations were found.)

Taxes

“In this world, nothing can be said to be certain, except death and taxes.”  Benjamin Franklin.

When it comes to renting both residential and commercial property, being certain of taxes is undoubtedly true. D.C. requires all Landlords to register with the Office of Tax and Revenue (OTR) through a form called the FR-500 Combined Business Tax Registration. Yes, as a Landlord in the District, you are viewed as a business. This registration sets into motion the annual requirement of every Landlord who collects more than $12,000 in gross rental income annually to file a D-30 Unincorporated Franchise Tax Return. The D-30 is a schedule form that allows landlords to deduct mortgage payments, property management fees, repairs, property taxes, and any other expenses relating to the rental operation. This form must be filed every April 15th to declare all rental income, and then to pay the associated tax. Using 2020 as an example, the 2020 tax rate was 8.25%. The minimum tax owed was $250, even if you declared a loss. If your gross income was $1,000,000 or greater, then your minimum tax was $1000.  

More about penalties. If you have not filed the D-30 for previous years, you may be required to file all of the back year(s) D-30 tax forms before you can start the licensure process. The reason? If you don’t file them, you will not pass the Clean Hands Certification. When you the file back year(s) forms, you are stating that you do not owe  more than $100 to the District. Don’t forget, there are penalties and interest associated with lack of filing and non-payment. If you have filed D-30 tax forms for the previous years, there’s almost no chance that you’ll hear from D.C.’s Office of Tax and Revenue.

FYI: OTR’s 2020 D-30 tax forms and instructions booklet explains penalties: 

OTR will charge-

A penalty of 5% per month if you fail to file a return or pay any tax due on time. It is computed on the unpaid tax for each month, or fraction of a month, that the return is not filed or the tax is not paid. It may not exceed an additional amount equal to 25% of the tax due.

A 20% penalty on the portion of an underpayment of taxes if attributable to negligence. Negligence is the failure to make a reasonable attempt to comply with the law or to exercise ordinary and reasonable care in preparing tax returns without the intent to defraud. One indication of negligence is failure to keep adequate books and records.

Interest of 10% per year, compounded daily, on a late payment.

A one-time fee to cover internal collection efforts on any unpaid balance. The collection fee assessed is 10% of the tax balance due after 90 days.

A civil fraud penalty of 75% of the underpayment, which is attributable to fraud (see DC Code 47-4212).

 

You’re probably saying “eek” or using more colorful language at this point, but before you get too upset, consider this. If you are like many Landlords whose rent covers their expenses, you might only owe the minimum tax of $100. If this is the case, your “penalties and interest” could be less, depending on the number of back years you did not pay.

Now, for owners who collect less than $12000 gross rent in a calendar year, the law states that you do not need to file a D-30 tax form. If you choose this option, we recommend that in its place, you take one of the following actions:

  • File a zero return showing why you owe zero tax, or 
  • Send a letter to that effect.

Note: Filing a zero return puts the tax office on notice about why you did not file a D30 and pay taxes. This notice can save you from headaches in the future. In the past, we have worked with owners who decided to not file a D30. The result was this: When it was time for them to renew their license, they couldn’t renew it because OTR questioned their missing tax returns. In the end, OTR had them write a letter explaining the situation, and then updated their file. As a result, their DCRA license renewal date was late, which meant they had to fight to reduce the late penalties on the license. 

If you would like more information about the D-30, the FR-500 Combined Business Tax Registration, or any other tax matters from the District, check out the District of Columbia Office of Tax and Revenue website.

(Note: The information provided is for informational purposes only and should not be construed as legal or tax advice. We suggest that you always seek competent professional advice for all legal and tax matters.)

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