Sometimes things don’t go according to plan and a tenant doesn’t pay rent. Or maybe you are unable to fill a unit and are facing extended vacancies.
Unfortunately, in these situations, you cannot decide lost rent. You can deduct the ongoing cost of operating and maintaining the property, but you cannot deduct the $1,000 that Joe Shmo didn’t want to pay you last month.
The reason for this is that you never recognized the $1,000 as rental income. Because of that, you will report $1,000 less rental income than you could have otherwise. And because you report less rental income, you can’t also deduct the lost rent as now you’d be reporting $2,000 less rental income. You’d basically be counting it twice.
As an example, in a perfect year, you have $12,000 of gross rental income and $5,000 in expenses leading to $7,000 in net income.
Joe S. decides to not pay you his December rent of $1,000. Now you have $11,000 in gross rental income and $5,000 in expenses leading to $6,000 in net income.
So you “benefit” to a degree by not reporting the income you would have otherwise had to report.
If you also got to write-off that lost income, you’d report $11,000 in gross rental income, $6,000 in expenses, and $5,000 in net rental income. Unfortunately, this scenario doesn’t hold merit because it’s illogical.
So your best bet is to get Joe S. out of the unit and place a tenant that will pay in full and on time!
