When you have a tenant who stops paying rent, or you are unable to collect rent for some other reason, it feels like you should be able to get some kind of tax benefit for all that lost income. But what can you actually claim on your taxes for lost rent from a deadbeat tenant or some other situation that prevents you from collecting rent income? Unfortunately, you can’t really claim anything for the lost rent. The only tax advantage you get for unpaid/delinquent rent is that you didn’t receive the income, so it’s not part of your taxable income. So, in a sense, you’re sort of getting a tax benefit, but it may not be as much of a tax benefit as you might have hoped.
But what about when businesses “write off” bad debt, to get a “tax write off” for it? All that really means is they’re removing the income they didn’t receive from their taxable income. Individuals with rental properties are generally going to be using the “cash” accounting system, which means you report your taxable income when you actually receive the income. Some businesses instead use the “accrual” accounting system, where income is reported in their taxable income when the income is earned, even if they haven’t actually received the payment yet. So under that type of accounting, the business may say they are “writing off” bad debt when they remove income from their books that they had previously reported as taxable income.
Any expenses you incur while trying to collect unpaid rent will generally be an expense you can deduct (lawyer fees, etc.).
It’s also important to know that there may be significant tax consequences if you choose to reduce the rent price for someone who is unable to pay their rent bills. While that’s a kind gesture, if you are renting a property for less than the fair market rental price, then under section 280A of the tax code your rental days may instead be characterized as personal use days. That would mean you would lose the ability to deduct expenses from your taxable rental income. The facts and circumstances will make a difference in that determination, but in general it would be best to continue to make a reasonable attempt to collect the full rent amount, rather than volunteering to just rent to the tenant at a reduced rate.
