Re: Is Landlord Double Dipping?

Mark Bole wrote: ...

I don't see anything at all out of the ordinary for a couple guys who are relatively handy essentially volunteering some work to make improvements for cost irrespective of their day jobs. I certainly did it often enough as a young pup right out of school when $$ were tight and it was easier to get something improved if could do it oneself rather than expect the landlord to deal with something that really wasn't necessarily broke, just could be better.

In those days, never had a 1099 issued, but they were simpler times and landlords weren't professional landlords, either; just renting an earlier house or even earlier a widow lady taking in students in the basement of her house...

For the same reason my daughter has provided labor and materials in exchange of forgiveness of rent - to have the advantage of the "improved" property while they lived there. There might not be a profit motive at all other than to enjoy the improvements.

That's like saying I love my job and have no profit motive, only the side effect of enjoyment of deposits into my bank account.

Remember, there has always been the assumption of an arm's-length transaction between parties with adverse economic interest, at least in my replies. Is your daughter renting a property you own?

Where is Paul Thomas when you need him? ;-) This is starting to sound like some of the long threads I've seen over in the unmoderated group regarding what constitutes taxable provision of services.

If you receive something of value in the open market in return for your labor, it's taxable income. Rent is imputed at fair market value even if it's not collected in cash.

Over in the Quickbooks group a while back, it seemed to come as a surprise to some experienced CPA-types that if a self-employed chef, for example, receives free nights at a Bed-and-Breakfast in exchange for providing services in the kitchen (which benefit the owner through publicity and such), it is a taxable bartering exchange -- even if the chef has business travel expenses that offset the value of the free lodging he received, and even if the B+B owner has contract labor expenses that offset the income from the room rental.

While the net effect of a bartering exchange between two businesspersons may be no taxable profit, the gross income test for required-to-file must still include this income. The tenants, in our current example, once they deduct legitimate business expenses for providing the service, have left only non-deductible personal expenses for shelter (just like a tenant who paid rent in cash). If they didn't have $6K out-of-pocket expense for providing the service, they have taxable income which they happened to spend on rent.

I don't need to be told that there are an incredibly high percentage of people who mistakenly believe that since bartering transactions are cashless, they somehow are not legally taxable. I'm sure it happens all the time...

-Mark Bole

dpb wrote: [...]

Me too, same thing, but I was still in school. Being ignorant of the tax law nearly thirty years ago, I might have even failed to report the bartering income on my paper-and-pencil prepared return, thank goodness the statue of limitations has expired. But you have to ask, why was the landlord willing to forgo the rent, unless he thought the repair was an ordinary and necessary business expense to justify the rates he charged? Oh wait, maybe he was ignorant of the tax law too...

Those 1099's are a real pain to issue, especially since you can't download them from the IRS web site (not scannable). You really have to go to some trouble to issue one...

-Mark Bole

Not the same at all. You work your job first and foremost for income, the fact that you love your job is a side effect.

If you own your home and make improvements, are you implying that the main motive is to increase the value of your home for profit when you sell it? I think most people will install a patio or swimming pool because it fits their life style, and while it may add to the property when they sell, it is not the prime motive for doing so. Heck, I have lived in my home for almost 40 years and have put in many thousands of dollars in improvements, never once considering the increase in value to my property. I only did it because I wanted the improvements for myself

- any increase in value is a side effect.

Why should renters be different. My daughter lived in a rented house for several years and will probably continue to live there for a few more years. If the landlady is willing to let her make improvements that my daughter wants and the landlady is willing to pay for the materials by forgiving rent, why does there have to be any other motive?

I am not questioning the rest of your fine post, only your assumption that tenants would not be willing to make improvements to rental property unless they had a profit motive in addition to the having the improvements to enjoy during the remainder of their stay.

I find it absolutely plausible for a tenant to make $6000 of improvements and receive $6000 in rent compensation in return and have no profit at all to show for it.

No. I own my home. I pay myself imputed rent (which is non-taxable, thank goodness!) I am making a capital improvement and upping the imputed rent to take that into account -- it's now a luxury rental!

This is from an economic perspective, not a tax perspective. This is also why many people have a skewed perception of the economic value of home ownership -- they don't take into account the imputed rent. Many people live in homes they could not normally afford to rent, but they can do it because they are paying the "opportunity cost" of their equity and have government subsidies in the form of artificially lower property tax.

Because they are not owners(1). They are not assuming any risk.

Sorry, that's not how I interpret the tax law, but disagreements welcome.

-Mark Bole

(1) in a limited case, California does try to make an equivalence between owners and renters. Homeowners typically receive a homestead exemption on their property tax, worth approximately $70 off their annual property tax bill. California renters, below certain income levels, receive a renters' credit of $60-120 to equate to this break to homeowners, since the landlord does not get the exemption on a property that is not his primary residence, and the legislature figured, someone ought to get it.

OK. I will offer this hypothetical, not exactly my daughters situation but close.

Daughter and grand kids want a hot tub at the house they rent and there is a great place to put it. Landlady says she is OK with that and will pay for the materials (about $5000) but not the labor (about another $3000 to install a concrete pad and electrical wiring for a hot tub). It takes my grandkids and myself a weekend to pore the concrete and install an underground conduct, circuit breaker and wiring (all inspected by the city of course). We purchase and install the hot tub. The total bill for materials (not labor) comes to $6000 which my daughter pays out of her pocket. My daughter and grandkids now have the use of the hot tub for the remainder of there stay at the rental unit and the landlady has the increased value to her property.

The landlady forgives $6000 in rent as agreed.

Should a 1099-MISC be issued? If so how would my daughter report it because her outgo = her income. The only (value) enrichment is the landlady's. My daughter's only gain is the enjoyment of the hot tub (but I don't think enjoyment is taxable) and we freely gave our labor, not for the landlady's enrichment but for my daughters (and grandkids) enjoyment.

Ernie Klein wrote: [...]

Why should a renter who pays in cash be any different from a renter who pays in services?

-Mark Bole

Ernie Klein wrote: [...] and we freely gave our labor,

That was a gift.

-Mark Bole

The OP was about forgiveness of rent in exchange for both materials and service. If the question is accommodations in exchange for service then I would agree that this is a barter and a 1099 is improper.

Ernie Klein wrote: [...]

You'd be surprised.

Meant to say, that was a gift from you to your daughter. She in turn used the value of the gift to pay her rent. (I assume there were no strings attached, in other words she could have chosen to sell her now-advantageous fixed-price lease to a third party).

No different than if you had given her a check for X thousand dollars, and she decided to use it to pay the rent, while at the same time asking her landlord to install or upgrade some amenities to support the current fair market value of her monthly rental charge.

Or, maybe she is a highly valued tenant who always pays on time and takes excellent care of the unit, and thus she deserves a break on her rent to reflect the reduction in risk to the landlord from having her as a tenant.

-Mark Bole

Agreed.

But if the landlady issued a 1099-MISC like in the case of the OP, then how should it be handled? That's the question I was trying to get to.

No. You misunderstood, (or more likely I didn't make myself clear), my daughter _spent_ her own money for materials which the landlady _payed back_ by forgiving rent, a 1 for 1 exchange. If any gift was made, to was to the landlady for the labor that she was never charged for.

I will add, that there were indeed strings attached -- the landlady agreed that she would not _increase_ my daughters rent for the next 5 years. However, in todays market, with housing prices falling and rents falling in this area, there may be no value in that agreement at all.

Right on!

I certainly was ignorant of the law at the time and am absolutely certain I didn't report anything as income in these instances... :)

In this case I doubt the landlord is particularly ignorant -- he figured I expect he's getting a deal as well in that it would probably have cost more than the $6K to have hired the work professionally...

Not really that much trouble unless you try to mimic the fancy graphical layout. They don't have to look like the IRS-printed forms; simply have to contain the proper data and the right box numbers. I did them in simple spreadsheets while still consulting (for subcontractors).

What are you talking about?

Then go to that link and read the "ATTENTION" notice which says that the online form is _not_ scannable and there is a $%0 fine if you file it.

Seems rather dumb - why have it all all if you cant use it?

You didn't actually look at that PDF, did you?

If you had looked at the first page, you would know that it says the IRS may fine you $50 per return for filing non-scannable forms printed from the PDF.

For 1099 forms you either need to have the IRS mail them to you, or buy a package of them for ten bucks at an office supply store.

R's, John

I think there have been other threads about this in the past.

For one thing, to have any meaning the 1099 needs to be filed with both the payee *and* the IRS. Just issuing one to the payee might be easy, but what's the point?

I don't want to contact the IRS to send me some paper-based forms -- what am I supposed to do, go find an antique typewriter somewhere?

The business version of Turbotax does have a W-2/1099 capability, I recall reading that although they don't print out in red, the IRS still finds them acceptable.

While I'd like to find out I'm wrong, my conclusion from prior research is that if you want to use a computer and you want to do it "right", you've got to pay for it. Many firms advertise this service, just do an Internet search.

-Mark Bole

Yes, this is an important attention; thanks for pointing out. I followed the link and ordered some 1099-MISC to see what the order process would be like. Surprisingly, it's free. I ordered a few; hope they don't fine me for ordering forms and not using them. But then there are several lengthy publications to read, of which publication 1179 seemed to be the most relevant. They have all sorts of rules on the paper, font, ink, etc, etc. I'm pretty sure my laser printer at home would do the job, but then I'd have to do lots of research to be sure. Then there's the problem of aligning the printed ink with the paper. The publication 1179 does say that handwritten forms will be accepted (page 13) though I didn't read the surrounding text to see if applies only to 1099.

The strangest thing to me is that regular 1040 forms can be downloaded and filled out using the form fields of PDF. Then you can mail these in. Presumably the IRS just scans these in. So In wonder why they did not do this for the forms like W2, 1099-MISC, etc.