Tenants Trading Work for Rent With Landlords
Question
A tenant in my 4-plex is a painting contractor and we are discussing trading two month’s rent on his unit for some painting on the property and for some painting on my personal residence. How do I handle this income tax-wise?
Answer
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, but I’ll mention a few things about each.
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 was a carpenter who offers to construct a storage shed on your rental property for 2 months’ rent, you must 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.
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 his 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 licensed painting contractor and he performs work for multiple customers, 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. The types of work allowed by workers not licensed for the particular trade varies among the states. The maximum cost for which a license is not required, so long as not otherwise required to be performed by a licensee varies among state. 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 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. You should require proof of the required insurance coverage, but you still need know that your insurance policy provides secondary protection. Unlicensed contractors seldom carry the necessary 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 (to workers themselves, to other of your tenants, or the public) or related to damages to the property of tenants or the public. 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
Many of the tenants in my apartment complex have more than 2 vehicles even though there two parking spaces available per unit. This occasionally causes problems when a tenant is using more than his 2 spaces. Can I legally limit the number of vehicles a tenant can park on my rental property?
Answer
Landlord-tenant laws of most states do not specifically address this issue. Accordingly, a landlord may control parking in a reasonable and equitable manner. What might be considered reasonable may depend on the type of property and the available parking space.
A landlord should control parking space assignments to tenants rather than the number of vehicles a tenant may have. A landlord would not have a right to restrict parking on public property – for example, on the street in front of the property – except as restricted by the city or a home owner association. Furthermore, although likely not an issue for your property, it may not be reasonable to limit a tenant of a SFR to one or two vehicles when there is ample parking space for six vehicles. Of course, lawns, flower beds, or patios would not be included within such parking space. Any governmental restrictions or HOA rules can be enforced by the landlord just as well as can the lease agreement clauses, however, as with most rental issues, in order to avoid misunderstandings it is best to have parking rules well defined in the lease agreement.
Similarly, depending on the location, it may be reasonable and enforceable to prohibit vehicles being partially dismantled or up on blocks. There could be other issues that might concern other tenants of your property, the government, and/or neighboring property owners.
Furthermore, the number of available parking spaces should be disclosed during the marketing of the vacant unit, certainly prior to lease signing, in order to avoid last minute problems. As with many other issues, in order to avoid claims of fair housing laws, rules should be applied in the same manner to all applicants and to all tenants.
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Qustion
The lease term for one of my rental units is nearing completion, the first time it is occurring since I bought my triplex. Do I need to serve the tenant with a notice to quit the lease?
Answer
What you need to do to terminate the lease depends on the clauses in your lease agreement and, in a few states, the law. It can be of benefit that the lease agreement explicitly discusses end-of-lease issues in some detail. For example, the agreement may state that the tenant is expected to vacate the unit by the end of the lease term if an extension or renewal agreement has not been executed by the parties at least some number of days (typically 30) before the ending of the existing lease term. As another example, the agreement may state that the lease becomes a month-to-month lease if no action has been taken regarding an extension or renewal, the landlord has not given notice of termination, and the tenant holds over beyond the term end – often with an increased rent amount. This latter clause should always be included in a lease agreement.
It never hurts to provide a termination notice prior to term end no matter what the lease requires when the landlord desires to have the tenant depart rather than renew or extend the lease. The tenant can be notified that you do not wish to extend his tenancy beyond the term of his existing lease by providing a written notice that clearly states that fact. No reason need be given and it is best to not give a reason that can in any way be considered a violation of fair housing laws. Such a notice can be given at any time prior to term end unless otherwise required by the lease agreement or law, but it should be long enough in advance for the tenant to find new housing.