In our last blog, we discussed the problems landlords are incurring due to Covid restrictions on evicting tenants who don’t pay their rent.
In this article, we will discuss the how landlord’s are impacted by these policies and relief available for them.
Though some landlords may have considerable resources to fall back on, that is certainly not the case for many that depend on the rental payments from tenants to pay the mortgage on the rental property. In some cases, if there is a positive cash flow from the property, the rent may be helping to pay the owner’s other bills as well, just as you would expect.
So what help is available for landlords?
Some mortgage relief may be available from the property owner’s mortgage provider but this is dependent on facts and circumstances for each case. Poor credit history could result in denial of relief.
Rental property owners are eligible for EIDL (Economic Injury Disaster Loans) from the SBA to help tide them over until all the Federal, state and local eviction moratoriums expire. Up to 6 months of rent can be borrowed, up to $150,000, This is certainly a big help but the moratoriums have been extended once and may be extended again if the virus is not contained. Also, many landlords own multiple properties. There are cases where $150,000 in aid won’t be enough.
Many think unpaid rent would be deductible. leading to a lower tax bill. However, uncollected rent is not a deductible expense. It is a debt owed to the landlord by the tenant. There is no deduction for unpaid rent even if the tenants never pay their bill.
The good news here is that the uncollected rent would result in rental property losses which could be deductible. But, that isn’t true in all cases.
The why not here is a bit complicated. Rental losses are classified as passive losses which prevents many landlords from applying the losses against their other non-passive income, such as wages. Though rental losses are passive, there is an exemption which allows up to $25,000 in these passive losses to be applied against other income but only if your income is below $100,000 for a joint return. If you make less than $100,000, you can receive all of the deduction. But if you make between $100,000 and $150,000, the allowable deduction slowly disappears until it is 0 at an income of $150,000.
These rental losses don’t disappear, they are deferred until income drops low enough to allow recovery of the losses or until the property is sold. That may be helpful down the road but doesn’t help those with cash flow problems in the here and now.
Also, the passive loss limits can be avoided if you qualify as a real estate professional and materially participate in the rental activity. That’s great but qualifying for this exemption can be difficult.
If income is too high for immediate deduction of the passive losses, they can still be deducted against other passive income. Examples of passive income include income from investments known as PIGS (passive income generators). These include limited partnerships, income other rental activities, dividend stocks, savings account interest, peer-to-peer lending, affiliate marketing, REIT’s and others.
Being a landlord is not always easy.
AFS – Tax preparation, tax problems, tax planning, bookkeeping, payroll