Tax question regarding rental property

[kent]

My granddaughter and her husband own a rental in CA (they are stationed at Fort Bragg NC).

They had a tenant that stiffed them for about $5,000 in 2013.  They had allowed him to pay his "security" deposit on the installment basis and he didn't do that OR pay his rent.  I know nothing about this tax stuff so, can they deduct that loss or offset the rental income they got during from other renters or are they out of luck?  At least they were able to "coax" him out of the place without going to court or jail.

Thanks in advance for your help!

[mwcpa]

for most taxpayers "uncollected" revenue does not create a loss. most taxpayers are "cash" basis reporters, so only income collected is reported as gross income. if your granddaughter reports her income on an "accrual" basis they she may be afforded a bad debt deduction for the uncollected rents (provided she exhausted all efforts of collection).

she though would be allowed to deduct all of her ordinary and necessary expenses incurred during this time.

think of it this way to make it easier, merely an example...

a cash basis reporter

Rents collected           0

Mortgage interest 1,000

Real estate taxes    500

Repairs                  250

Insurance              100

Total expenses    1,850

Net loss              1,850

accrual basis reporter

Rents billed         5,000

Mortgage interest 1,000
Real estate taxes    500
Repairs                  250
Insurance              100

Bad debt             5,000

Total expenses    6,850

Net loss               1,850

[kent]

Dec 28, 2013 6:42:09 GMT -5 mwcpa said:

for most taxpayers "uncollected" revenue does not create a loss. most taxpayers are "cash" basis reporters, so only income collected is reported as gross income. if your granddaughter reports her income on an "accrual" basis they she may be afforded a bad debt deduction for the uncollected rents (provided she exhausted all efforts of collection).

she though would be allowed to deduct all of her ordinary and necessary expenses incurred during this time.

think of it this way to make it easier, merely an example...

a cash basis reporter

Rents collected           0

Mortgage interest 1,000

Real estate taxes    500

Repairs                  250

Insurance              100

Total expenses    1,850

Net loss              1,850

accrual basis reporter

Rents billed         5,000

Mortgage interest 1,000
Real estate taxes    500
Repairs                  250
Insurance              100

Bad debt             5,000

Total expenses    6,850

Net loss               1,850

Thanks MW!    I've forwarded the info to them.

[Bonny]

kent,

BTW, even though the renter is out, your granddaughter could pursue collection of the back rent, any damage, and a real estate commission in small claims court if she has a written lease. One has up to 4 years to bring action against a breach of contract in CA. CA's small claims limit is now up to $10k.

I'm considering it with the tenants who rented my mom's condo in San Diego. They left it a pigsty including leaving a weeks worth of dirty diapers and bags of dog poo on the balcony. People can have money problems but don't have to be jerks.  

They left last Spring and it took me a while to locate them. I'll probably file when I'm back in the area this summer and have time to file the action.

I hope your granddaughter has a better experience with her next set of tenants. There are some good ones out there.

[rangerj]

NOTE: Legal fees and other costs incurred in pursuit of income are deductible as itemized deductions. However, as this is a "business" property the expenses would be business expenses deductible from rental income under section 162 (ordinary and necessary business expenses).