Do you own a multi-unit complex of any kind? Do you have a property manager on site? If you answered “yes” to both of these questions, then you probably offer them some kind of lodging/accommodation in addition to their base salary. Normally, you’ll pay your property manager an amount commensurate with the number of units they’re managing and the nature and amount of work involved. This “free rent” you’re offering your property manager can cause tax problems if mismanaged. For you to be in the clear, you must fulfill the following conditions: The lodging must be part of the property being managed. There must be a valid reason for providing the lodging. The property manager should accept the lodging as a precondition of employment. Should one of these conditions not be met, then you’ll be forced to include the lodging’s net value on the manager’s W-2 form. They will be required to report the free lodging as income on their tax return. You probably have all the three requirements checked off your list by now. But are you out of the woods yet? Well, not really. Here’s the thing: you’re covered when it comes to federal tax liabilities. But that’s as far as it goes. State tax laws are a different issue altogether. Here’s what Barbara Klein, one of our clients, experienced. The Good Barbara acquired a multi-unit apartment complex. She held it in a newly-created Limited Partnership and managed it with a corporation to protect her assets. She then decided to give an existing tenant free rent (a $600 value) as payment for being the on-site property manager. The duties assigned to the manager included addressing tenant complaints and concerns and making minor repairs. Because of the fairly small size of the property, no other compensation was included. Two months into owning the property, Barbara decided to redo the entire roof of the building. Two tenants happened to be professional roofers and offered to do the job. In return, Barbara agreed to give them six months of free rent. The roofing was completed in a month. The Bad Three years later, a rookie state auditor out to prove a point performed an audit on Barbara’s Limited Partnership. He did not understand the terms of the roofing job or the duties of the on-site manager. Consequently, he made a labor and industries assessment of $90,000. He assumed that Barbara had hired three people full-time for three years. The Ugly It gets worse! Barbara’s apartments earned her a gross of $100,000 every year. Labor and industries assessments were about $30,000. But she did not pay Workers Compensation, so the figure was bumped up to $200,000. This was 25% of the value of her property. Ouch! What to Do to Protect Your Assets Here’s the thing: this soul-crushing turn of events is not even the worst part. It’s that she could have done something to prevent it, but did not. You don’t want to be taken to the cleaners for careless mistakes like Barbara was. Here’s how to keep your assets protected: Have a formal contract with the on-site manager that treats them as an Independent Contractor. Hold all your property under a corporation. Most importantly, have an asset protection professional by your side since the law differs from state to state. Royal Legal Solutions has the reliable experts you need to help you prevent property management issues.