Effective for income earned on or after January 1, 2016, House Bill #5's amendments to the Municipal Income Tax Statute became effective. So, real estate brokers and salespersons need to discuss this Statute with their tax professional when preparing their 2016 income tax returns.
Ohio Rev. Code § 718.02 provides what income is subject to taxation:
This section applies to any taxpayer engaged in a business or profession in a municipal corporation that imposes an income tax in accordance with this chapter, unless the taxpayer is an individual who resides in the municipal corporation...
As applicable to real estate brokers and salespersons, the Statute provides:
(1) Except as provided in division (F)(2) of this section, commissions received by a real estate agent or broker relating to the sale, purchase, or lease of real estate shall be sitused to the municipal corporation in which the real estate is located. Net profit reported by the real estate agent or broker shall be allocated to a municipal corporation based upon the ratio of the commissions the agent or broker received from the sale, purchase, or lease of real estate located in the municipal corporation to the commissions received from the sale, purchase, or lease of real estate everywhere in the taxable year.
(2) An individual who is a resident of a municipal corporation that imposes a municipal income tax shall report the individual's net profit from all real estate activity on the individual's annual tax return for that municipal corporation. The individual may claim a credit for taxes the individual paid on such net profit to another municipal corporation to the extent that such a credit is allowed under the municipal income tax ordinance, or rules of the municipal corporation of residence.
Ohio Rev. Code § 718.02(F)(1) and (2) (emphasis added).
Under F(1), calculating the income taxable in a particular municipality is done by dividing the net profit earned in the municipality by the total net profit earned anywhere in the same taxable year. For example, if an agent only sold one house in Smallville, OH, in 2016 and earned $1,500 of commission and earned a total of $10,000 in all sales for the year, the portion of income taxable in Smallville would be $1,500/$10,000 = 15%. Income should be tracked by brokers and salespersons and reported in municipalities that impose an income tax.
If the broker or salesperson is a resident of a municipality, then Section F(2) applies, all income should be reported there, and there may be a credit available for income tax paid in other municipalities.
If you would like us to help you evaluate how this decision may affect you, please contact Frantz Ward partner Mark L. Rodio