If you’re a landlord who has tenants who can’t pay due to COVID-19 or other reasons, you may be wondering if you can deduct unpaid rent. It depends on how you keep your books.
Can you deduct unpaid rent if you use cash-basis accounting?
Most landlords use the cash method of accounting. This means you enter things in your books when you get the cash. For example, if you got your January 1, 2022 rent on December 31, 2021, you enter it in your 2021 income.
You can’t deduct unpaid rent if you use cash-basis accounting. The reason is you have nothing to deduct. Since you never got the cash, you never had the unpaid rent become part of your income. You will pay less in taxes because your income is now lower. But getting an extra deduction would be double dipping.
Is unpaid rent tax deductible if you use accrual-basis accounting?
You may use accrual-basis accounting if you’re a larger landlord or your accountant told you to. This means you enter rent in your books whenever it’s due. If your rent is always due on the 1st, you record it on the 1st whether your tenants pay early or late.
If you entered rent in your income that you never got, you can take a bad debt tax deduction. The bad debt deduction is equal to the amount of unpaid rent. To take a bad debt deduction, you generally need to have little to no chance of collecting the unpaid rent now or in the future. If you do manage to collect full or partial payment after you’ve taken the deduction, you’ll need to add that payment back to your income. The main idea is that you should get taxed on the exact amount of rent you received.
If you decide to waive or discount rent for tenants who have a hardship due to coronavirus, you’d enter that on your books like any other discount. You’d then only get taxed on the actual amount that they pay not the full normal rent.
Do landlords pay taxes on rental assistance?
In most cases, landlords will pay taxes on rental assistance. This can either apply to COVID-19 rental relief or permanent rental assistance programs.
If the assistance is paid on behalf of the tenant, this will almost always be taxable income. It’s the same as the tenant paying in cash.
If you receive a grant from the government that isn’t tied to a specific tenant’s rent, this will also generally be taxable income.