Tip #110: Tax Implications and Other Warnings for Rent Credits by James Safonov
Occasionally it is necessary to give rent credits to tenants.
Random rent credits by themselves are not necessarily a bad thing. The context surrounding the credit and the amount of the credit(s) can be troublesome.
First it is important to distinguish what should be credited and what shouldn’t. Anything that requires a professional contractor should not be credited. Replacing a toilet seat or a refrigerator water filter is probably harmless–just have the tenant provide a receipt.
Some owners have negotiated a recurring credit for landscaping or for owner access to a storage shed. For example: the original rent was $1000.00 monthly and included a gardener. After a period of time the tenant and owner agree to reduce the rent $60.00 per month and allow the tenant to service the yards. They keep the rent at $1000.00 but include a monthly credit of $60.00 to the ledger.
This $60.00 monthly credit equals $720.00 annually and can be perceived as tenant income by the IRS. The landlord would need to give the tenant a 1099 for the $720.00 as it exceeds the $600.00 annual amount of earned income.
A better course of action would be to reduce the rent to $940.00 and do away with the recurring credit.
James Safonov is a property manager with HomePointe in Sacramento, California. HomePointe provides full service property management, leasing, accounting, and maintenance. If you or anyone you know has questions about property management in Sacramento, rentals in Natomas, Roseville or beyond please do not hesistate to contact James at email@example.com.
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