Dear PoPville – How do you handle rental income for Illegal Units?

Photo by PoPville flickr user Roots in the Sky

Dear PoPville,

In different discussions I’ve seen people reference the fact that DCRA is tough to deal with when renting out a row house and many people just opt to take their chances, screen tenants carefully, and hope for the best while avoiding DCRA entirely. My question is when you do this how do you handle the rental income? I am assuming that just because you didn’t go through DCRA you still claim the rent as income but I wanted to know if there is anyone out there that can speak (anonymously) to their experience! Thanks.

52 Comment

  • It’s still income, whether or not your unit is licensed. You still have a legal obligation to report the income for tax purposes.

    • Exactly, If you don’t report this income, you may very well get audited years later, when the interest compounded will be a critical blow. It’s much better to go by the book.

    • IN the 20 years i have lived in DC i have learned one thing. F THE dc government. When you try to do the right thing it will do more harm then good.

  • I can’t imagine a DCRA problem being as bad as an IRS problem.

  • Al Capone didn’t go to jail for an illegal apartment, or for murder.

  • You might conside hiring an accountant because they will know how to depreciate that part of your house, for significant tax savings. It is income but will be offset by mortgage. It gets complicated but I found it was well worth the cost to use an accountant. The DCRA has nothgin to do with your taxes, it’s not relevant.

  • Yeah, having a legitimate “certificate of occupancy” from DCRA and having a propery registered rental unit has zero to do with your requirement to claim income from the rental.

    You simply claim it as rental income on your taxes. If you do your taxes online or with turbo tax, it is super easy.

  • You can claim it as income and also depreciate a percentage of the home as well as reporting the utilities, insurance, etc. In the end, it typically works out in your favor

  • Please call them undocumented units… thanks.

  • You can always put it under the “embezzled or other illegal income” field on your 1040.

    • I remember this from when I studied federal income tax. You have an obligation to report illegal income. Awesome feature of the tax code.

      • yeah, Harry Thomas Jr. got in trouble not just for stealing $350k but also for not paying the taxes on it.

  • You’ll have to file a D30 with your DC tax return as well.

  • It’s actually illegal to not register with DCRA, if I’m not mistaken. And, a “landlord” that doesn’t is simply a slumlord.

    • You and I apparently have a different definition of slumlord.

      • Good thing all these “slumlords” exist– or else all thse English basements in my neighborhood would be sitting around unoccupied and rents would be twice as high.

    • Right because if you want to rent a nice, clean basement apartment with 7′ ceilings to someone who is 5’5″ and has no problem with it you are obviously a slumlord.

      • A friend of mine rented a great basement in NW for years. Clean apartment, safe neighborhood, front door, two back doors(!), lots of light, beautiful kitchen and even high ceilings. But it was gray market because there was an internal staircase. Dude that owned the place was so far away from a slumlord.

  • I will live in your row house at no cost to you. You will not have to report anything to the IRS or register your place with DCRA. Problem solved.

  • ah

    The question you need the answer to is whether DCRA will get income tax data (i.e., your report of rental income) from DC OTR or the IRS in order to identify the fact that you have an illegal apartment.

    I am pretty sure the answer to that is “no”. At worst DCRA would be able to get that information after they’ve already found out you have an illegal apartment and they need additional proof.

    DCRA is much more likely to find out you have an illegal apartment from a disgruntled tenant or neighbor.

    • pretty much what I said, just 90 seconds later than you.

    • Also, DCRA’s enforcement authority is so impotent it is almost a voluntary system. Only those that comply and register typically get dinged. It is a joke actually.

    • Actually, yes….if your income is reported to *ANY* local/state/federal agency, it will get back to your local or state tax agency and to the IRS. After 9/11, to combat terrorist financing, all state/local tax agencies began linking their reporting systems to not only each other, but to the IRS.

  • I think what you are saying is that you want to report your income but don’t want to get dinged/fined by DCRA. Take a look at the tax forms but I question whether you even need to identify the property address in your tax filings – you may not. The IRS is certainly indifferent to whether you followed the state regs. They just want the tax. Also, DCRA and the taxing authority are separate entities and I wonder if they even share information with one another. I suspect they don’t or if they do, they are not organized enough to understand the data and enforce the rules. There is not one database available to all government entities and I have found they are quite territorial, in any event.

  • there’s also a difference between renting a basement apartment and renting a “room in your house” – which is what english basements are technically considered.

  • Full disclosure: I am not an illegal landlord. Here’s what I’ve understood, though, if you do decide to go through the route of not registering, getting proper license and C of O for your apartment. You need to report that income as income for tax purposes. Although you need to have a clean bill of health in order to process the paperwork for DCRA housing rental units, couldn’t say for sure if they share information beyond that, though the potential seems like it would be there. I say this answer, though, not advoating this route though (even if there are many illegal rentals in the city). All you need is 1 tenant and 1 incident for things to go awry. If you don’t have the proper paperwork, things will go poorly for you, quickly and you will have no recourse. I understand the process at DCRA to be properly licensed, etc. is a hassle and a time-consuming one, but personally I think it’s better to do it the *right* way.

    • This illegal landlord is taking his chances with DCRA but not with the IRS. There are laws, and there are laws.

      • Huh? How is your response a response to my comment? What are you replying to in direct response to my comment?

        • I suspect Anonymous 3:42 merely clicked “reply” by mistake instead of “add a comment.”

          • Actually I was responding to his comment. His advice is not to take chances with DCRA. I’m responding that I disagree. But whatever.

          • I am the Anonymous commenter to whom you are responding. That’s fine if you want to disagree with my perspective that it is always better to do things the right way, even if it is a hassle to go through all of the steps with DCRA. I will not advocate doing it the wrong way, here, in person or whereever. But I know people have been and will continue to rent out illegal apartments here for a number of various reasons. Everyone has a choice and I prefer to not rent out illegal apartments. Simple as that.

  • Claim the income on your taxes (and the subsequent write offs). Tax evasion is a way bigger deal than having an illegal rental..

    Besides, you’ll probably net out with lower taxes.

  • make sure you claim income on tax return. i think we need more detail as to how you will rent the house out. if you live in it and rent a room or rooms you do not need a COO just a basic business license which you will automatically apply for when you submit your taxes.

  • are you serious??? UNDER THE TABLE…. don’t claim anything!!! SHUT UP and cash the checks

  • Another reason to go through the DCRA hassle is that the tenant is entitled to be refunded the total of any rent collected from an “undocumented unit.” So an illegal landlord could be in trouble with DCRA, the IRS and have ZERO funds from the rental to show for it. Now that sounds like a hassle.

  • Aiding and abetting is a stretch, and i realize that trying to “avoid DCRA” is a bit like saying you’d rather “avoid being poked in the eye”, but it is a little odd for an increasingly legit blog to post something like this.

    • Most basements in D.C. don’t meet DCRA’s Certificate of Occupancy requirements (minimum ceiling height, front and back entrances, no connecting stairs, etc.), and those COO requirements are extremely expensive to achieve. It’s widely acknowledged that (as a result) most basement rentals are technically illegal.

      I don’t think PoP counts as “aiding and abetting” in posting a question from a prospective landlord of such a unit.

      • Not complying with DCRA requirements is not a “crime,” so there can be no aiding and abetting.

        • Its funny where people draw the line. It seems like the consensus is it’s ok to turn a blind eye to DCRA regulations but not the IRS. FWIW the chance of being audited for everyone under $200k AGI is <1%

          • Again, tax evasion is a crime. Not getting a license from DCRA for your rental apartment DRCA is not. Makes perfect sense to draw the line between the two.

          • Yeah, it’s funny how everyone is pissed off how corrupt our elected officials are and then talk about how it’s okay not to do things the legal way because working with DCRA is a pain…

            You can’t have it both way folks!

          • there is a link between the two. over regulation creates both corruption and lack of compliance.

            If regulations were simpler across the board it would be both easier for citizens to comply and harder for officials to be corrupt.

          • You must be a Liberatarian. Politics aside, though, how is DCRA an example of over regulation? You think it’s wrong to have certain standards/requirement for rental apartments in DC? Apparently a lot of other cities would disagree with you. You think it’s wrong to have to have a license to run a business? Please remind me not to patronize any business you may own or operate if you think these basic regulations are too much to comply with.

          • If you take a look at an apartment and don’t like it, don’t rent it. Why can’t the renter decide whether it’s worth renting or not? DCRA doesn’t check things like plumbing, electrical wires behind walls, or structural integrity anyway, so “being an uninformed renter” shouldn’t really apply as justification for DCRA anyway

          • clearly those standards are wrong if they render half of the basements in DC illegal, that should be self evident. every single regulation has a cost, and if these regulations were followed the rental market in dc would go from merely insane, to a hellscape of souls lamenting for affordable housing while the blood of the innocent turns the streets red.

            You pay for every regulation is what i’m trying to say.

          • Uh, no. I currently save money every year because of fire code regulations, the clean water act, and the fact that car manufacturers have to build safe cars.

  • Interesting that all these posters are cautioning you and telling what could happen, but no one knows anyone that’s been busted by the DCRA for not going through the proper channels. Truth is, over half of the houses and English basements rented out in this city are not registered with the DCRA. Of course, report the income on you tax return, but going to the DCRA would be a Pandora’s box for you.

  • Anyone ever use a service like I need to get licensed to rent my condo, will be living out of state so I’ll need a resident agent also. I’m having nightmares already about DCRA. Thinking it’d be worth it to pay someone, had a real estate agent offer to file for an extra 500 fee so I started looking for other agents. Anyone else use them?

  • I don’t know if it was legal or not (I guess I never really thought of it until now…) but I have never once declared the rent my roommates paid me in college and grad school as “income” – I just thought of it as their share of housing expenses, even though the lease and most of the utilities was usually in my name.

    So, if you don’t have to declare a roommate’s part of rent and utilities as “income”, then if you live upstairs, I’d just consider the tenant a “roommate”. Especially if you share any part of the property (washer/dryer, rear yard, even just the mailbox), I think a valid argument could be made there.

  • when you claim rental income, you can also claim all sorts of expenses, it is very likely that the amount of net rental income added to your gross income would make a very small change to your tax liability.

    It is also good to do this because in case you ever have to do some major repairs to your rental property, you can claim a loss from that investment and that can offset your gross income, so you would end up paying even lower taxes.

    Do the right thing, report the income to IRS. If not, then don’t ever tell anyone about it!

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