You’ve been renting the same apartment for ten years. Your landlord says to you:
“For the past ten years, you’ve been a perfect tenant. So next month, the 10th anniversary of your move-in, no rent is due–you get a free month. Happy anniversary.”
I’d guess that in IRS-tax terms, this is a gift. But is there a more specific or precise term in accounting/business–someone giving you not cash, but something for which you’d normally give them cash?
What’s the term, and/or category, for this kind of thing?
In the UK it could be classed as a benefit in kind if the landlord was also your employer, but otherwise it is simply a gift which would not normally be taxable. (Problems would only arise if the landlord died and the gift was considered part of his estate)
If your landlord had given you an ongoing rent reduction, that would not be taxable, so why would a one off free month?
Well, where two companies declare mutual gifts of substantial value,
the tax people might call it a tax dodge… Then they make it a “deemed transaction”… A transaction that the tax auditor deems not to have occurred in the manner stated on the papers presented… they deem it to have occurred in the manner that they say… They say it was really a payment of cash from A to B for asset C, a payment of cash from B to A for asset D… someone made a profit, it was an exchange of goods or service that was somehow incompatible with the business model ; not a real and fair exchange.
Normally stock asset is only deemed to be profit in the year that it is sold. However the tax office can deem that the asset was actually (partially) a profit made at the time of the transaction in which the asset was received,because it was only received as an asset so as to dodge tax… For example, converting profit to gold bullion just before the end of the financial year, and then selling it again straight away in the new financial year… Other times the companies with the same owners transfer assets among themselves to reduce the tax bill…
Residential rent is not tax-deductible. As such, whether you pay say, $1,000 a month for 12 months or for only 11 this year does not affect your taxes at all.
Whether the landlord collects $12,000 or $11,000 does affect his income and his taxes. But he is free to set the rent as he chooses.
It gets slightly more interesting if instead of this being your residence, it’s something like you renting the storefront where your retail business is.
Now you have $1000 less rental expense to offset against revenue when determining your profit and hence your tax. All else unchanged, your yearly profit will be $1000 higher and so you’ll end up paying some additional tax to the IRS which partly offsets your $1000 benefit from not having to pay rent one month.
OTOH, as with the residential case, the landlord has $1000 less income which also lowers his profits $1000 which lowers his tax proportionally. Ballpark, the amount his tax goes down will match the amount your tax goes up. The IRS comes out pretty much even.
And as **Isilder **said so eloquently, if the transaction smells like a scam to the Feds they may attack it. But otherwise it’s just another example of business discretion at work.
To answer the direct question you asked, the technical term for paying something less than full price for a good or service is “discount”.
Late add: And for both the landlord and tenant a strict accounting treatment of the rent would show rental income or expense of $12000 and an offsetting discount of $1000.
Actually, this kind of thing is extremely common. In commercial leases, it’s almost standard practice to ask for a month or two of free rent in exchange for signing a new long-term lease. Even in residential units, it’s common.
A “rent reduction” is the terminology I see used most often and as long as the reduction is not part of an exchange of goods/services, then there’s no tax reporting needed. As an example of an exchange, though, a $500 reduction if tenants make their own repairs is considered income to the tenants and income/expense to the landlord.
With no exchange of goods/services, you have some leeway in how you report the income, but 1040 Sch E doesn’t even have a line to separate gross receipts from returns and allowances the way Sch C does. As a result, your tax reporting will just show $11,000 of income, not $12,000 with a $1,000 expense. Your internal bookkeeping can show it however you like - for management purposes, I would recommend showing the gross less the allowance just to illustrate how much rent is being given away.
There is one other case where the US tax code might fuss about rent reductions. If you’re renting to a related party (say, your kids) then you must be charging something close to fair market value for rent. If you charge too much less, then you are not considered to be renting for profit, and this changes how you report every element of rental income and expense.
If the landlord is using the cash method of accounting, since he didn’t receive the cash, then it’s not reported as gross income (which is different from gross revenue). This is well within the standards of “normal and necessary” business operations.
Another slippery slope here is Fair Housing Laws. The landlord would have to forgive a month’s rent for every tenant on the tenth anniversary to preserve his positive defense against discrimination lawsuits. If the landlord forgave the month’s rent simply because he liked the tenant, then the landlord would have to prove it had absolutely nothing to do with the color of the tenant’s skin, gender, religion, family status or the several more protected classes.
This may seem unfair to have to prove the defense … but remember, landlords write the laws … judges should expect landlords to follow these laws to the letter.
This would be true if the landlord used the accrual method of accounting, and the $1000 would be an adjustment on the accountant’s worksheet. It wouldn’t show up on the income statement, thus it wouldn’t be reported on the tax forms. The accrual method would be unusual for a rental business, landlords don’t keep an inventory of empty units on hand like a hardware store keeps a box of widgets in the backroom.
A lot of you have offered guesses rather than knowledge. I’m a CPA, let me help:
The normal term for this is a rent holiday or rent free period. It’s not a gift. Gross income and Gross revenue (and Gross Sales) all mean about the same thing.
Landlords don’t have to offer every tenant the same deal, so long as discrimination isn’t the reason for the differences.
Only small businesses can use the cash basis (with only a few excpetions).
When an accrual basis landlord offers a rent holiday, a calculation is done that spreads the contract’s rental income over the months it runs. So, income IS reflected even if not charged. Same is true for the deduction of an accrual basis tenant.
Tangentially, if someone donates the use of a space to a non-profit, it would be a “non-cash contribution” or “gift in kind” to the non-profit. The non-profit would report the gift on Schedule M; I believe the donor can claim the appraised value but I’m happy to be corrected.
As a very simple answer: You only get to deduct a non-cash gift up to your cost/basis in it.
If I pay $1000 for a weekend rental and then donate that rental to the charity, I do get a deduction of $1000 (my cost).
If I paid $500 for a weekend rental normally worth $1000 and I donate that to charity, I get a deduction of $500 (again, my cost).
If I own the rental and I donate a weekend of use to the charity, my deduction is still based on actual costs, not the appraised value. My actual costs might be negligible in this case.
No, the real estate owner has no deduction in your example. Also no income.
Think of the following conversation - “I’m going to charge you monthly rental of $5000, and then I’ll make a monthly contribution to you of $5000”. Net zero for the non-profit, net zero for the owner.
Picking up income and making a contribution is the same result as picking up no income and taking no deduction.
But there’s no transaction, no transfer of an asset. TallTrees can correct me, but if the primary purpose for giving the non-profit $1000 so they can pay the rent of $1000 to you is so you can get a tax deduction … then the tax code explicitly forbids this. You’ll have to have some other primary purpose.
Don’t get into it too deeply, you’re mixing up things.
As long as there’s no benefit received back, it doesn’t matter what the purpose is of a contribution of money or property given to a charity. There are rules that govern specific kinds of property and specific situations, but cash is cash.
To say “the tax code explicitly forbids this” is incorrect. I don’t know what your point is but I can’t think of a situation this comment fits into.
The term the OP is looking for is “rent abatement”. Usually the lessee seeks an abatement from the lessor due to damage to the property or for some other reason, but the term could also be used in the situation described in the OP.
And generally for tax purposes, a rent abatement has no tax consequences. There is less income for the lessor and less expense for the lessee.
