Considering trading two months rent….
Qustion 1
I am considering trading two month’s rent on a unit rented to a painting contractor for some painting on the property where he lives and for some painting on my personal residence. How do I handle this income tax-wise?
Answer 1
You actually need to be concerned about four different legal issues. One is the income tax ramifications that you ask about and this is by far the easiest one to fully address. A second relates to state and federal employment laws. A third, for some states, relates to contractor licensing laws. A fourth issue is insurance coverages. The other three issues would each require a lot of discussion to cover adequately.
If you receive property or services, instead of money, as rent, include the fair market value of the property or services in your rental income. If the services are provided at an agreed upon or specified price, that price is the fair market value unless there is evidence to the contrary. If the services are related to operation of a rental property, the amount may be deducted or depreciated, depending on the nature of the services provided.
Include in your rental income the amount the tenant would have paid for 2 months’ rent. You can deduct the portion of that amount that was for work on the rental property as a rental expense for painting your rental property. The portion of
the amount that was for work on your personal residence, although included in the 2 months’ rent, cannot be deducted as a rental expense for your rental property.
If instead your tenant is a carpenter who offers to construct a storage shed on your rental property for 2 months’ rent, include in your rental income the amount the tenant would have paid for 2 months’ rent. You can depreciate that same amount in accordance with the appropriate depreciation schedule.
If the shed is constructed on your personal residence property in exchange for 2 months’ rent, you would include the 2 months’ rent as rental income for the rental property. If this shed can be considered a capital improvement to your
personal residence property, you can add the amount to the basis of your personal residence property, meaning that the amount will not be subject to capital gain tax when the residence is sold in the future.
I’ll only discuss very briefly the other three issues. If you have questions regarding the following, feel free to post again.
Regarding employment laws, workers are classified by state and federal statutes as either employees or independent contractors. If employees, issues such as income tax withholding, social security taxes, unemployment insurance, and workers’ compensation insurance must be considered – and there are other possible issues. These issues are not directly a concern when a worker is legally an independent contractor (IC). However, a worker cannot be classified as an IC because he says he is one or because the person paying him wants to avoid the burdens of classification as an employee. There are criteria that determine whether a worker is an employee or an IC and further discussion is beyond scope of this
answer, but the criteria is most basically related to the control each party has regarding the tasks being performed. For your case, if the tenant is truly a painting contractor, you might want to assume he can be treated as an IC, but such is not guaranteed and safety comes only from satisfying the state and federal government rules.
Regarding the licensing issue, many states limit the type of work and/or the cost of a project that can be legally performed by non-licensed contractors and there can be serious consequences related to breaking licensing laws. Type of work is often related to the risk of injury or damages related to work that is improperly done – e.g., many states prohibit electrical or plumbing work by unlicensed workers. For some states, the maximum cost can be as low as $500.
Regarding the insurance issue, you need to make sure that your insurance policy will cover you for liability that might result from injury or damage to property caused by the workers, whether licensed or not. If the contractor is licensed, the state will require him to carry liability insurance and, if he has employees, workers’ compensation insurance, but you still need know that your insurance policy provides secondary protection and you should require proof of the contractor’s insurances. Unlicensed contractors seldom carry required insurance.
Of the three issues other than income tax, the insurance issue can have the largest financial loss due to possible litigation related to injury (of workers or the public) or damages. These issues are discussed more fully in our Mini Training Guide titled “9 Steps to Avoiding Problems When Hiring a Contractor.”
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Question 2
A tenant in my 10-unit apartment building has complained about cigarette smoke drifting into his unit from another tenant who smokes on that other tenant’s patio. My leases prohibit smoking in units, but what about a tenant smoking on patios that bothers another tenant?
Answer 2
For multi-unit properties, prohibiting smoking inside units and in common area hallways and within some distance of residents’ patios, balconies, doors, etc, can actually reduce the risk of problems. Because tobacco smoke is often considered a nuisance in the same way that loud noise would be considered a nuisance, if tenants are complaining about drifting tobacco smoke, landlords must take action to protect them. Some states have specific laws regarding secondhand smoke issues.
Landlords and property managers who fail to accommodate non-smoking tenants who complain about secondhand smoke may be exposing themselves to lawsuits even if not in violation of laws. If a resident or prospective resident has a disability or chronic illness which is made worse by exposure to tobacco smoke, Fair Housing Laws will require a ”reasonable accommodation.”
The solution to avoiding problems is to both prohibit smoking inside of units and on associated patios and balconies and to make tenants responsible in the lease agreement for damages resulting from failing to adhere to the prohibition. For smaller properties, where smoke might drift to units or common areas from the farthest corner of the land, prohibition must apply to everywhere on the property.
Most basically, there is no law that prevents landlords and property managers from regulating smoking on the premises, whether inside individual units or outside in common and private use areas. This is because (1) there is no constitutional right to smoke and (2) smoking is not protected by Fair Housing laws. HUD does not prohibit non-smoking policies in affordable housing.
Prohibitions against smoking require that applicants first be made aware that the unit is a non-smoking one and that smoking elsewhere on the property is strictly limited. This is important in order to avoid wasted time and money in processing applications for those who might be unwilling to sign a lease that includes non-smoking provisions. Upfront notice can be accomplished in advertising, in an information sheet attached to the application form, or within the
application form itself.
The lease agreement should, of course, contain very specific clauses related to the non-smoking issue. In addition to a clear statement of the prohibition and the extent thereof, acknowledged by the tenant upon signing the agreement, the
lease should also set out in some detail a list of property damages resulting from smoking for which a violator will be responsible. The list would include items such as burns or stains on any component of the unit, odors, smoke residue on any surface, and potential other liabilities such as damages resulting from smoking related fires.
The lease agreement should clearly make the tenant responsible for the cost of repairing, cleaning, painting, or replacing any items so damaged. Of course, the tenant must be initially provided with a unit that has no evidence of previous smoking-related damage or such previous damage must be noted in the move-in checklist.
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Question 3
I am a relatively new landlord and am wondering how long must I keep documentation related to operation of my rental home?
Answer 3
Landlords need to keep records related to every vacancy for at least the length of time when they might be relevant to defending against an alleged fair housing violation or against a lawsuit from regarding any issue related to a current or former tenant.
They must keep all records related to all applicants, current tenants, and past tenants. This includes advertising copy, sign-in books for open houses, phone logs of inquiries, returned applications, all types of screening reports, lease greements, rent payment records, maintenance records, and letters and notices to and from applicants and tenants.
The required retention period varies because the time allowed for filing of fair housing claims or of a lawsuit varies among states as well as between federal and state agencies. It can depend on a specific state statute or by the general statute of limitations laws applicable to the potential cause of action. The length of time typically varies from 2 to 5 years among the states.
Retaining the documentation will help ensure that the landlord is best able to defend against a lawsuit for any complaint charging housing discrimination or for any other disputed issue.
For property managers, who are regulated by a state licensing agency, the records which must retained and the period of time for which various records must be retained are defined by state statutes and/or regulatory agency regulations and the periods may be different than for unlicensed landlords managing their own properties.