Rent Credit - Tax Perspective


#1

I’m being told by my CPA that the downpayment on homes should actually be considered rental income as well. How do others treat this?


#2

Huh? Down payment on the rent credit program?

The rent credit program does not tie the renter to any one home. That is the whole point of it so one can claim there is no mortgage and therefore dodge the loan originating laws. No loan, ergo no down payment. The tenant accumulates rent credit “green stamps” which have no value until they have enough worthless rent credits that you simply give them title to their home in exchange for basically nothing. You have at that point disposed of business property in exchange for nothing, just like you threw out a leaky old garden hose, which if you were deprecating the hose you would write off the basis of the hose. So be it with the home you just gave away.

Here is an angle I’ve never seen discussed:

I would think that if the IRS ever got wind of the whole RC affair, they would go after the new home owners for taxes due for receiving a gift worth over – what is it? – $2,000. Surely that is how they would see it; the tenant paid nothing for the house, therefore it was a gift from good ol’ kind hearted Landlord, lovable doofus that he is.

Why not scrap the RC program and sell off the damn POHs just like any sensible, cigar smoking businessman would? For an empty home, you can demand a down payment (I find $2k works well) and a higher monthly payment which frees up your capital quicker.


#3

Yes, most I know require downpayments to encourage pride of ownership and increase the likelihood of title actually transfering and ultimately becoming a TOH. If I’m not mistaken, for accounting purposes, many treat as a security deposit.


#4

It is a security deposit. If the guy moves out and leaves the home clean, you have to give it back to him. If, say, he puts up a $1000 deposit and gets within $1000 of the rent credits and uses the $1000 to finish the deal, then you sold the home for $l000 (plus worthless rent credits.) Then you would have a capital loss of your basis minus $1000.

It is never a rent payment. I don’t think you CPA is thinking clearly.

Get John T. Reed’s book on Taxes for Real Estate investors and read it. He has a lot to say about CPAs that really ring true. He brings Harvard Business School analyses to the law’s gray areas and how best to treat them and how CPAs treat them. It is a real eye opener.