Dear Tax Talk,
Hello! I have a primary home I rent out because I had to relocate for my job. The tenant was having difficulty paying on time, so I agreed to lower my rental fees from $1,450 a month to $1,200 a month.
The fair market value for rental income that I could charge for my property, according to various websites, is in the ballpark of $1,500 a month.
My question is, am I able to claim the rental income loss deduction that I incur each month as a result of getting lower rental fees than what fair market value would bring?
Unfortunately, in your situation there is no deduction for rental income that is not received. Even though the fair market value may have been $1,500 a month, because you do not include this amount as income, you cannot claim a bad debt deduction.
However, you can deduct all of the expenses you have paid during the year that are related to the rental property except for your mortgage payment. If you have a mortgage, only the interest portion is deductible, not any payments to principal. Instead, you will be able to depreciate the cost of your property using Form 4562 to calculate the amount each year.
Now that you are a landlord, you will calculate the income or losses from your rental activities on your Form 1040 using Schedule E, Supplemental Income and Loss. This form is helpful as it lists the various deductible rental expenses you are allowed to claim.
Ask the adviser
To ask a question on Tax Talk, go to the “Ask the Experts” page and select “Taxes” as the topic. Read more Tax Talk columns.
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek professional advice based on their particular circumstances.