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Posted by removeps-groups@yahoo.com on April 16, 2008, 7:33 pm
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wrote:
> 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.
http://www.irs.gov/publications/p527/ar02.html#d0e228
<Quote>
Expenses paid by tenant. If your tenant pays any of your expenses,
the payments are rental income. You must include them in your income.
You can deduct the expenses if they are deductible rental expenses.
See Rental Expenses, later, for more information.
</Quote>
<Quote>
Uncollected rent. If you are a cash basis taxpayer, you do not
report uncollected rent. Because you do not include it in your income,
you cannot deduct it.
</Quote>
> 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.
Actually, I don't think it's self-employment income. If it were
periodic, then maybe. Therefore only report it on line 21 Other
Income. There is no social security tax, but there will be federal
tax. I hope you don't have an estimated tax penalty.
> 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.
Not sure if what you say is right. Say your annual rent is 12k. His
rental income would be 12k. Then say he made the improvement of 6k,
so he would depreciate over a period of years, say for example 1k a
year. So net income first year is 12-1=11k.
But if you fixed the item, then he reports rent income as 6k plus the
expenses paid by tenant of 6k. So net rental income is still 12k.
And first year depreciation is 1k. So taxes for the landlord are the
same.
Say you're in the 25% tax bracket. In the first case your net tax is
T and savings as the end of the year is S. In the second case, you
pay 0.25*6000=1500, but then again you saved 6k on rent payments so
your savings are 4500 and the governments take is 1500. By giving you
a 1099-MISC for 6k, it seems the landlord invented 6k out of thin air,
like a printing press.
Similar thing happens when companies issue stock, which I don't quite
understand. If they issue 10000 new shares and market price is $10 a
share, then it's as if they printed 100,000 out of thin air. But
isn't the government the only one able to print money?
> 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?
Yes to the paragraph above.
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