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For 2017 taxes (USA) I formally converted my first home to a rental by declaring income, establishing cost-basis for depreciation, etc. The tenant's lease is July/2017-July/2018.

Complicating things, the tenant is a friend of mine..

The tenant has never been particularly on-time submitting his rent payment. At first it was close to the first of the month, then it was the beginning of the second week, and by now it has drifted toward the end of the month. While he's consistently late, to his credit, so far he has paid for each month.

As an aside, I am not particularly keen on how the property has been kept. Most glaring is the impact of his smoking inside, including a cigarette stain I noticed on the bathroom vanity...which was nearly brand new when I moved out. To be fair, though, he's probably par for the course for renters at this price point ($500 a month).

Last month he suffered a health emergency and subsequently had to undergo major surgery. While I am concerned for him as a person, especially as my friend with worsening health, I can't help but simultaneously be concerned about how this may play out downstream and how it may affect me financially.

Financially, I suppose the medium-worse case scenario for me is this fellow will not be able to afford a month or two of rent. Does the IRS even allow me to let that slide, particularly with respect to the fair market rent IRS requires? If the IRS does allow me to mitigate the loss, what documentation should I be mindful to collect? Are there any other ramifications I may want to consider in advance so that I can remain ahead of them?

  • Note to tag editor (Roderigo, sorry I lost your handle): I rejected removing the "expenses" tag because I consider that angle relevant here, as I'm asking about documenting a loss. – elrobis Apr 10 '18 at 20:00
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Disclaimer: I am not a tax specialist

If you are using a cash basis for accounting (meaning you count revenue when you receive it and expenses when you pay them), the IRS won't care. It's not a "loss" - it's just revenue that you were planning on that didn't materialize. So if the rent was, say, 1,000 a month, and he didn't pay for 6 months, your income would be 6,000 instead of the 12,000 that you could have gotten. That might mean that you have a net loss for the year, depending on other expenses related to the house.

If you are using an accrual basis (meaning you account for revenue and expenses when they are earned rather ten when they are paid), then your income will include all months where the house was occupied, whether it was paid or not. The rent will be a receivable asset. At some point you could deem the rent uncollectible and deduct the expense as "bad debt expense". You probably need a CPA (if you don't have one already) to make sure the claim will hold up to an audit.

As to whether there will be impacts in regards to fair market rent, I do not know. However I suspect that if you choose not to collect rent for those months out of kindness, then it could be interpreted as a below-market rent and you would have the corresponding tax consequences.

  • +1 thanks for the insights. I'm going to leave the question open for a little while to encourage some more answers. FWIW, I don't know which of those calc' approaches apply. I used TurboTax to file and went with the defaults...I did however spend several hours researching "calculating cost basis" to make my best, good faith calculation of my cost basis, since it seemed like depreciation would play off of that number for years going into the future. – elrobis Apr 10 '18 at 21:02
  • beautifully written answer – Fattie Apr 11 '18 at 0:11

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