With all of the governmental restrictions on collecting rents and the fact I've provided a valued service to my tenants -- I'm thinking on "deducting" past due rents as a "loss". I know this is an unheard of strategy. Let's all talk with our CPA's and come up with a plan.

I'm required to give non-paying tenant forms outlining the tenants ability to get out of paying the rent -- giving them "protections" set up by government. Anyone with a large accumulated debt, like a years worth of unpaid rent, will either declare bankruptcy, skip town or move out of State.

So if I'm required to hand out free rentals with a slight expectations of repayment, then the value of the unit is a loss....

IRS Tax Codes state I need to rent out my units at Market Rents or be excluded from curtain deductions.

So if 25 of my tenants refuse to pay 1 years worth of rent, that will add up to a $300,000 loss....The tenants now have $300,000 worth of free goods and services. They should pay income tax on getting free lodging.

On 300K income I should net $150,000. The tenants should pay taxes on their free rent to the tune of $150,000. Because I can take no current legal action against deadbeat tenants (tenants with the means to pay rent but choose not too), the burden should shift to the Government and my Tenants..

Therefore unpaid rents should be a deduction....against other income....and let the tenants pay a "GIFT TAX", not the landlord.

What's your opinion...Worth pursuing.

In the new CA rent control environment, seems to me that new rental agreements should be shared housing only, so you rent to the new tenants plus your brother or cousin is also a co-tenant on the rental agreement. If the tenants do not pay, then you move into the apt with your brother along with his buddies in the Hells Angels.

Robert J, I have a lot of respect for your opinion and experience, but this is a silly question. The lost rent is reflected in your gross income .

Yes David, this may be a silly idea, but NE came up with a winner... and normally I agree with W, lost rent would be water under the bridge... but I just can't let this one go.

I love your ideas and way of thinking.

I also like what NE said.

6x6, I don't think the IRS has a dog in the fight at that point.i believe you can forgive a judgement debt by issuing a 1099. You just can't go after the money anymore.

It could create a world of hurt on an assistant dependent tenant if it works. It could also suck up expected tax returns come tax time.

"It could also suck up expected tax returns come tax time."

Maybe deduct it in the taxes paid column. The government has taken money out of your pocket and given it to a welfare recipient.

Interesting concept for sure. I didn't think about the 1099 option. I was thinking that anyone not paying would just be a loss as you would still have your same expenses but not the income (just like if it was vacant and READY to be rented but no renters). You just don't claim the income (that isn't there/coming in).

However, with the 1099 thought ... that could possibly be income to the tenant ... I don't know if it CAN be but it makes a bit of sense. To your point though - you wouldn't be able to collect but maybe you can.

What is the difference though when you evict (in the past) and have the loss ... you never used a 1099 then though ... just took it as non-income (the expense was there but no income).

My first idea in response to this post was also to "forgive" the debt, rather than pursue collection.

Whether that would put you in a better tax position, I don't know (because I've never done it yet) But, Then at least they may have some negative consequence of their behavior, by paying taxes on it. Of course, that assumes they file their taxes.

1099-Misc is for contractors or anyone to whom you paid $600 or more in a year. You will not have checks or anything to prove you "paid" a tenant. So I wouldn't use this one.

1099-C is the forgiveness of debt form. It *must* be used by banks and lending institutions during foreclosures and such, but CAN be used by individuals and other entities.

Because you can forgive debt when it becomes clear it's uncollectable instead of in the year incurred, this might be the better route anyway. It can give them a CHANCE to pay up if the tax thing scares them (a LOT of people rely on those refund checks!)

There is no "debt forgiveness" here. You didn't lend the tenant any money that they have to pay back.

The fact that they lived in your house rent-free for six months is reflected in

1) your decreased gross income (revenue)

2) expenses staying the same

OK on 2nd thought, here is how you might have "debt forgiveness".

You loan tenant $1000. Tenant immediately gives you that $1000 to pay the rent.

So in that scenario, tenant would "owe" you $1000. But you'd have to declare the $1000 as rent income.

Landlords will need to check how they file locally. In Pa, I can file under landlord/tenant case or civil suit. I would file this as a civil suit to get the judgement and forgive that. That bypasses the CDC moratorium. I'll only go after possession with the last month they owe for rent and file under landlord/tenant then.

I also would not forgive any debt at all until the moratorium ends so you can still evict or go after possession at a later time.. Or until the year ends and you file your taxes, then issued a 1099.

If it got to this point for me, I will just file on them civilly every single month for the monthly rent and do it each month until this moratorium madness is over. They would probably get sick of having to takeoff of work to go to court if they indeed had a job.

** might be worth sending them a projected tax payment disclosure in the mail. Hahaha

Six months of rent due equals $6000. Estimated taxes due are $1500. Some of them probably would not be smart enough to think that it would be taken out of the return and even think that they have to come up with that money to pay in. And they very well may. I don't know. If this works, I don't care either.

This could mess up a lot of things. Even child support in some situations. If you have a single mother who shows much higher income, she could get her support dropped with her ex-husband depending on that arrangement. You could really throw a wrench in the spokes of their world with this.

I suppose you could deduct it - if you used the accrual method of accounting.

So far all om my tenants have been paying their entire rent as agreed. If I end up with a tenant who decides not pay their rent I will try to get them out for a reason other than non payment of rent. Since we're so close to the end of this tax year, I doubt that it would be worth my while to forgive any unpaid rent in the 2020 tax year. However if during the 2021 tax year an uncollectible tenant decide to try to stiff me, I would have no problem with forgiving their debt & sending them, the Commonwealth of MA tax bureau & the IRS a copy of my 1099 nec for the forgiveness of this debt.

Since I, like most of you use the cash method of accounting issuing them a 1099 nec would have absolutely no tax consequence for me but it could very well mess up any benefits they collect & definitely will have some tax consequences for them. About the only possible benefit for a LL would be a reduction in the income tax they pay on this rental because they will still have the same if not higher expenses & same depreciation while receiving less income.

Years ago when I forgave a tenant's debt & issued them a 1099 nec after they skipped out owing me a good deal of money, it took the IRS several years to catchup with him. Long story short, they froze his bank accounts, did a through audit for several years worth of his returns, sent the info along to the MA state tax bureau & made his life miserable.

Steve, how were able to find out what the IRS was doing to him and keep track of it?

Wouldn't that be his private information?

David, there is debt if they don't pay the rent but continue to receive the service. They are accruing unpaid debt.

It's not the same as if someone moved out and didn't pay the rest of the lease. That's just lost income, reflected in total income - and because technically you DO have the space back, they are not incurring debt.

NOT deducting, David, you misunderstand me. We would just report any income actually received as normal, balanced against any expenses as normal. I understand the Cash method of doing business. If I have an empty place, I can't deduct "potential" income that I might have made if it was rented as lost income. I just report a lower income.

BUT if a tenant does occupy a place, and they don't pay, they are accruing debt and if they do not pay it, then I can forgive it. I don't think it would affect my taxes at all? I'd have to ask my CPA.

In order for there to be "debt" to forgive, you'd have to set it up as follows

LL loans tenant $1000. Tenants turns around and pays LL $1000 for rent.

David, as I said, I was not looking for a way to deduct it off MY taxes, but only to ding the tenant by adding to THEIR taxes. And if you let them know in advance this could be the consequence, maybe they would find a rich uncle to borrow the money from...

i will ask my insanely great tax guy this today and report back. if they owe you money, as in an invoice or bill unpaid, you can write off the bad debt. my first blush response is in all cases i've seen the rent/debt is still due and owing (we simply cannot move to evict) but until it becomes defacto uncollectible it cannot be written off. once it becomes so, all businesses write off bad debts. the recent COVID related deadline extensions of all things might impact this. do not mix up receivables with the inability to file an unlawful detainer or eviction suit or what ever your town calls it.

Kramer: "It's a write off for them"

Jerry: "How is it a write off?"

K: "They just write it off"

J: "Write it off what?"

K: "Jerry , all these big companies , they write off everything"

J: "You don't even know what a write off is."

K: "Do you?"

J: "No , I don't"

this just in from a guy that reads the tax code (IRC) as he visits the restroom...i suspect he keeps a copy on the back of his toilet. seems appropo!

The tax treatment of late rental income depends on the method of accounting that the lessor used for income tax purposes. The two most common methods are the cash method and the accrual method.

The cash method:

Under the cash method, the lessor generally recognizes taxable income as cash is received. Therefore, lessors that use the cash method of accounting are not taxed on rental income until they have actually or constructively received the cash. As an example of constructive receipt, say a lessor received a lease payment from a tenant prior to the end of the year. For income tax purposes, the lessor must report the amount of the check as income for that year, even if the lessor did not actually deposit the check until after the end of the tax year. What matters is that the lessor had access to the income, even if they delayed that access until they deposited the check in the following tax year.

The accrual method:

Under the accrual method, the lessor recognizes taxable income as it is earned, which is deemed to have happened when the “all events” tests have been satisfied, regardless of whether the lessor has actually received the rent yet or not.

Under the all events test, income is recognized when 1) the right to receive the payment is fixed and 2) the amount of the payment can be determined with reasonable accuracy. Since the terms of the lease agreement will clearly specify both the timing and the amounts of the required lease payments, the accrual basis lessor will generally recognize rental income according to that schedule.

Unpaid rental income

The tax implications of unpaid rental income that is never collected also depend on the method of accounting the lessor uses for income tax purposes.

Because lessors that utilize the cash method of accounting do not recognize rental income until the rent is actually received, they therefore cannot claim a bad debt deduction if that rent is never received. On the other hand, because lessors that utilize the accrual method of accounting are required to recognize rental income as it accrues, they can claim a bad debt deduction for income tax purposes if rental income that they previously recognized as income is ultimately not collectible.

However, lessors are not allowed to simply create a bad debt reserve for such uncollectible amounts and claim a corresponding tax deduction based upon the amount they estimate will be uncollectible, as they can for book purposes. Instead, they must use the specific charge-off method. This means the lessor can only claim the bad debt deduction for tax purposes when and to the extent that the rent receivable becomes worthless. Determining when a receivable becomes worthless is a facts-and-circumstances test. Factors that should be considered include:

(1) Financial condition of the tenant, although this alone is insufficient

(2) Bankruptcy of the tenant and amount of assets available for satisfaction of unsecured debt

(3) Permanent cessation of the tenant’s business

(4) Whether the lessor is still continuing collection efforts

(5) Whether the lessor has sued and won a judgement and can show the judgement is uncollectible (note that the lessor is not required to file a judgment against the tenant if doing so would not improve the success of collection — i.e., no need to throw good money after bad)

(6) Documentation that the lessor has made every effort a reasonable person would take to collect the unpaid rent

Interesting Mike.

I had a tenant that I had kicked out about two years ago. They had a three plan in place to pay the $3,000 or so that they owed me in Feret damages. Boy do they stink - --

I ended up selling that place after fixing it up and getting rid of the nasty smell. The folks were paying me roughly $100/month until three months ago. Two months ago I gotta notice saying they had filed for bankruptcy. I have to wonder if i should claim that last $400 that isn't collectable now. Problem is what property do you place the bad debt on since it has sold already?

I'd just send the correct IRS form. If you think it may not be correct, then don't deduct the bad debt expense. But either way, whether it's correct or not, it's the tenant's problem to correct with the IRS. And that may screw up their refund until corrected.

And IRS debt is not removable by bankruptcy.

it's only deductible if you reported it...read closely it makes sense.

Thank you for sharing that Mike.

Is there no way to get them to sign a loan document? People on here talk about collecting lost rent after an eviction. So collect loan payments going forward. Tell them it's instead of eviction and will save their credit later.