Based on the thread Unauthorized Repairs, I'm going to ask about TAX consequences of having a tenant do repairs and buy equipment for a reduction in rent.

How are you tracking those expenses for tax purposes? You can't deduct lost rent, that's just income you didn't receive. If Tenant buys the equipment, he has the reciept, not you. So you lose out on the rent AND the legitimate deduction for the equipment and labor.

Firstly, the most "repairs" Ive authorized a tenant to do are to change out the showerhead and if they do that, I don't reimburse them.

but if you must wade into this thicket, you actually declare the full rent as income, as you normally would. Then you pay the tenant the amount of the "reduction." You would 1099 the tenant if necessary as a contractor .

WMH, you're thinking about this wrong.

Take this scenario in two examples:

* Tenant's rent is $1000/month.

* There is a repair costing $500.

Scenario 1: You pay Joe the Contractor and you deduct $500 against the $1000 rent, leaving $500 "profit" on which you pay taxes.

Scenario 2: You let Jimmy the Tenant do the work and reduce his rent $500, leaving $500 "profit" on which you pay taxes.

Same difference from a tax perspective. A $500 profit is left after the repair is done. Doesn't matter if you write a check or drop the rent.

David brings up a good point....if you were to be audited (low chance per my friend who is an IRS auditor, but still possible), the IRS might look at that as "paying" Jimmy $500 if his rent was too far below market. As long as you're below the magic $600/year paid, though, you are under no obligation to 1099 him...according to my CPA.

But if Jimmy did other jobs for you in return for reduced or 'free' rent, then you would be obliged to send him 1099 for the value of all discounts he received once the value exceeds $600.

That's another good reason for me to keep it clean and just pay folks via check. Simpler in the long run and it establishes a paper trail protecting me.

One time I had a tenant by the name of Jim, and he wanted me to authorize "improvements" instead of rent. I told him no way.

1. The work was not necessary.

2. The improvement was not going to increase my equity.

3. Jim was not licensed and had no insurance.

4. End of story.

My rental agreement says that tenant can't do repairs, upgrades or improvements. Furthermore, it prohibits tenant from talking to subs, get estimates, opinions and ideas from them.

To start with, you don't pay him until after he mails you the receipts for equipment and parts.

At the end of the year, if you have a place renting for $1,000, you declare you've had $12,000 in gross income. If you've reduced the tenant's rent by $500 for one month, you declare that you had $11,500 in gross income from that rental instead of deducting a $500 labor charge from your total gross rent.

It is a terrible idea to have a tenant do their own repairs. That is bad landlording, plain and simple.

W,

Reduced rent means less income to pay taxes on.

The limited times I have done this we collect full rent and write a check for the repairs. We will not write a check if rent is owed. They can endorse their check and hand it back as part of their rent.

I do not trust such workers to report their income and possibly drag me into trouble with employment, withholding issues.

Only on rare occasions, and only with residents that have asked me to do so, and have qualifying skills - will allow the resident to work with me on a DIFFERENT project, on a different house.

Pay and Deduct seldom works. Forcing the resident to work hard will train the resident that you are not the path to easy money. And even then, the contractor/handyman will need additional assistance.