I had a renter that broke the lease and moved out early, didn’t pay the last month they were in the unit, and left me a bunch of repairs and maintenance. The repairs and maintenance are easy to capture and report for taxes, but I’m trying to figure out how to capture the rent shortfall. I initially entered a transaction for negative rent for the months they didn’t pay, but subtracts from the actual rent affecting the rent amount for schedule E. I’m going to assume that’s probably not the way to do this, what would be a better way to capture this so I can include for tax purposes?
@bob In this situation, you would just not record the income. You cannot deduct a loss unless you record the income first. We’re going down the rabbit hole of cash basis vs accrual accounting methods. Stessa isn’t the right tool for accrual accounting.
Claim a Bad Debt Deduction:
- Bad Debt Expense: Since the tenant failed to pay rent that was legally owed to you under the lease agreement, you can treat the unpaid rent as a bad debt expense. For rental property income, if you report your income on a cash basis (which most small landlords do), you can’t deduct bad debt because you never included the unpaid rent as income. However, if you reported the rent as income when it was due and then later didn’t receive it, you can write off the bad debt as an expense.
- Recording the Expense:
- Record the full rent amount as income when it was due.
- Create an expense transaction for the same amount in your accounting system labeled as “Bad Debt” or “Uncollected Rent.” (I don’t believe Stessa can handle this part)
Hope that helps
-Tom
Thanks @tlatuga, I do record on cash basis. I did try creating an expense as you mentioned but couldn’t find a way to categorize it that would work, as you mentioned.
What about when the property off market for repairs for a period of time because of this, is there a way to claim that other than reporting days in service for taxes?
I also noticed that I needed to change the days of the lease in Stessa to change the days in service. For instance, the original lease was through Oct, but they only paid rent through June and moved out at the end of July. The lease was set as Oct, so rent roll showed rent due with no income which was nice because I could see what was owed. However, the days in service recorded through Oct which wasn’t the case and I had to update the end of the lease date to make that accurate. Technically that doesn’t seem right?
@bob If you’re truly taking the property out of service, it’s my non-tax professional opinion (not licensed to give tax or financial advice, this is for entertainment purposes only) that you’re no longer doing a repair but a capital improvement, which you would record as such and amortize over a period of time depending on property type and function.
For your lease issue, being that the lease is legally binding through October, your apartment is in service through October. The tenant physically abandoning the property and not paying rent are separate issues. In my state, the lease isn’t terminated unless I have signatures from the tenant or court documentation. Let me know if I am not making sense.
Hope that helps
-Tom
Hey @tlatuga, thanks for the info (for entertainment purposes 
) Since posting last I’ve done some homework and spoke with my cpa, and I did record days in service up until they actually left and not through end of lease, as well as the full flooring replacement, full paint, and microwave as capital improvements.
Interesting about lease termination considerations, I’ll have to check AZ, but there was no mutual agreement on them terminating early.
Thanks again!