1. Home
  2. Taxes General Forum
  3. Re: Is Landlord Double Dipping?

Re: Is Landlord Double Dipping?

Here's a tax question posed to me by my son regarding some

> of his friends. > > Tenants of a rental property improve the property. The cost > of labor plus materials is $6000. Their landlord pays them > for the improvements by forgiving $6000 in rent payments. > The landlord issues a 1099-MISC for the $6000 cost of the > improvements to the tenants. > > I understand that the tenants are obligated to pay > self-employment taxes on that portion of the $6000 that > represents their labor. (That is, the amount left over > after they deduct the cost of purchased materials from the > $6000 total on their Schedule C. > > However, it seems that the landlord is getting to count the > $6000 as a deduction twice. First, he is obviously > deducting the $6000 as a maintenance or capital improvement > expense, or else he would not have issued the 1099-MISC. > Second, since he received $6000 less in rental receipts we > are assuming that he did not record as income the $6000 he > did not receive. > > If he did not record the non-received $6000 as rental income > yet did deduct the $6000 as a maintenance or capital > improvement expense, would you agree that he has taken twice > the deduction he would be allowed?

I had an AC unit fail. It was worth exactly two month's rent. The tenant kindly handled the HVAC guy, and skipped two months. I claimed 12 month's rent on my Sch E, and added the AC unit as a capital improvement, and started the depreciation.

Your son's friends are worse off. They now have a 1099. Even though they should pay tax on the labor, it seems they have a 1099 for the full amount. Landlord sounds like he slimed them. Joe

formatting link

Reply to
joetaxpayer
Loading thread data ...

"Cost of labor" is not the correct term, unless the tenants hired an employee or subcontractor to do the work. Your own labor is not a cost to you, for tax purposes.

He didn't forgive any rent. It was a bartering (cashless) business transaction, with a fair market value of $6,000 (determined by two parties with adverse economic interests in an arm's-length transaction). As already noted, each side had $6,000 of income.

The self-employment tax is based on their net profit, not just their labor. If they were smart and added a mark-up to the materials(1), they pay SE tax on that too. If their net profit was low enough (approximately $433), they won't even owe that, just income tax.

(That is, the amount left over

And after they also deduct any other ordinary and necessary business expenses, such as business use of a vehicle to pick up materials and supplies for the job, small hand tools, etc.

[...]

Not really. If they had paid the rent in cash from wage income, they still would have paid (directly and indirectly through their employer) full FICA taxes on the equivalent labor. They also didn't have to incur non-deductible expenses such as commuting, as they would with wage income. Plus, they were able to schedule the work at their own convenience, rather than have their privacy and peaceful enjoyment interrupted by the schedule of some outside contractor hired by the landlord.

(1) not sure if that would trigger a sales tax obligation for the mark-up, assuming they paid sales tax on their purchase price.

-Mark Bole

Reply to
Mark Bole

And under this view, the 1099-MISC is the wrong document to file for the transaction. 1099-B is the correct document. However, see below.

How is this a business transaction for the tenant? There's no FICA taxes involved here. The landlord paid NOTHING (i.e. no check was issued), so the

1099 is erroneous. The tenant made a leasehold improvement, but we don't know if it's permanent or will be removed when the lease is up, so there's nothing TO the landlord either.
Reply to
D. Stussy

. . .

I don't think a landlord would foregive $6,000 of rent in return for improvements that will be taken by the tenant, do you?

The tenant made improvements, in return for $6,000 worth of rent.

Seth

Reply to
Seth

Probably not but stranger things have happened.

Which is NOT a disbursement by the landlord. Regardless, it was the purchase (and incidental installation) of an asset, and that's not

1099-Misc-able.
Reply to
D. Stussy

BeanSmart website is not affiliated with any of the manufacturers or service providers discussed here. All logos and trade names are the property of their respective owners.