Posted by R.S. Rodriguez
In February 2009, policy-makers with California’s Franchise Tax Board (FTB) issued new guidelines to be implemented at the start of January 1, 2010 requiring Property Management firms to withhold a certain percentage of rent collected by them on behalf of their clients. This policy only concerns residential property owners with properties in California, but whose owners live outside of California. Refer to the FTB for exemptions and waivers.
The new policy states property management companies now have the burden of informing their out-of-state clients as to this new initiative and are responsible for a quarterly accounting , withholding and submissions of such funds to the FTB. Granted, California current fiscal woes and budgetary problems are a mess. Currently, there is an approximate 20 billion dollar budget deficit in California and policy-makers are scrambling to close the gap. Unfortunately, this new policy seems to place an unusually high burden on property management companies to collect and submit these funds. By placing the tax collection responsibilities on property management companies, the FTB may unwittingly be jeopardizing the relationship between property management companies and their clients, respectively.
At Esquire Property Management in Ventura County, we are already experiencing concerns and skepticism by our client base over this new policy. The new policy states we are responsible for withholding seven percent of rental income and submitting those funds quarterly to the FTB. This policy places a huge tax collection burden on property management firms and have already caused many residential income property owners who live out of state, to drop their property management companies in order to avoid the fees we charge to manage properties coupled with the additional 7% to the FTB. The mind set of these property owners seems to be, “why should we continue to pay for your services along with the additional seven percent quarterly to the FTB, when I can manage the property myself and deal with the tax consequences in my own, creative way?”
We certainly understand the FTB has a right to collect taxes on these income properties. Unfortunately, by placing the collection burden on property management firms throughout California, the FTB is jeopardizing the relationship between property management companies and their clients. In the third week of the implementation of this new policy, we have already seen a significant decline of our out-of-state clientele. Additionally, this new policy has highly increased the amount of work, accounting, and costs associated with submitting the necessary documentation to implement these new measures.
In summary, we again certainly understand California’s right to collect taxes on these properties. Unfortunately, by placing the burden of these collections squarely on the shoulders of firms such as ours, some of our clients now perceive us not necessary as managers of their properties with their best interests in mind, but simply, perhaps, as tax collectors.