Taxes to Know Before Becoming A Live-In Landlord in Philadelphia

Obermayer Rebmann Maxwell & Hippel LLP

Obermayer Rebmann Maxwell & Hippel LLP

Now that the holiday season is over, the post-holiday blues are setting in and bills are piling up. Everyone is looking for ways to make more money to cover those extra or unexpected year-end expenses. The easiest way to bring in more money is to put existing assets to work. Homeowners, especially those in Philadelphia are doing just that. These savvy homeowners are renting out that seldom-used guest bedroom to short-term and long-term tenants. Room rentals are easier than ever before due to rental platforms that are widely accessible and more user-friendly.    

Renting out a room or even a part of a house is a great idea, but before doing so, homeowners should be aware that the Philadelphia Department of Revenue is specifically focusing on these activities. Late last year, the Philadelphia Department of Revenue issued a tax update specifically addressing this issue. In that update, it warned that “live-in landlords” may be responsible for filing and paying various City taxes. 

For example, short-term rentals, rentals for less than 30 days, are subject to the City’s Hotel Tax. Landlords are required to collect this tax from the tenant and timely remit the payment to the City.  Some rental platforms include this Hotel Tax in their charges, but since the collection and remittance of the tax is the landlords’ responsibility, it is best for the landlords to double-check that this tax is in fact being paid. If the tax is ultimately not paid, the landlords may be required to make the payment out of pocket. Landlords in Philadelphia are also required to file and pay the City’s Net Profits Tax on the rental income they receive and may also have a Business Income and Receipts Tax liability. If the rental period is more than 30 days, landlords are responsible for filing and paying the City’s School Income Tax. 

On the upside, landlords may take certain deductions related to their rental business activities which may help offset some of the rental income and hopefully, reduce their City tax liability. For example, landlords may deduct any expenses specifically related to the rented room or space, such as repairs, depreciation, and mortgage interest. In addition, landlords may deduct the portion of the Real Estate Tax paid on the rented space. These deductions may help take the sting out of the City taxes.   

Renting out a room or even a part of a house is a great idea to make more money, but before doing so, homeowners should be aware of their tax responsibilities especially in Philadelphia. The Philadelphia Department of Revenue’s recent tax update is a warning signal that the City is focusing on these rental activities.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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