Can You Claim Unpaid Rent as an Expense Deduction?

If your renter fails to pay you, you may be able to claim the unpaid rent as a deduction, depending how you report your income. If you use the property for personal use as well as rental -- a vacation home you rent out, for instance -- that may limit how much you can deduct.

Cash or Accrual

There are two choices for how you report your income, on a cash basis or an accrual basis. The cash option means that you claim rental income when you receive it and deduct expenses when you incur them. If you use the accrual approach, you report income when it's earned. If you report income on a cash basis, you cannot claim the unpaid rent as a tax write-off. Accrual reporting, however, allows you to write off bad debts.

Bad Debts

In accrual accounting, you record the rent as income whenever it comes due. If your renter doesn't pay, you may then be able to deduct the unpaid amount from the income you claim. You can make the deduction when there's no chance that you'll receive the money. Usually you have to make a reasonable effort to collect or show that reasonable efforts are impossible before writing the debt off. If your tenant files bankruptcy, for example, you have no way to make him pay.

Claiming the Debt

To deduct the unpaid rent, subtract the amount straight off your income in the year that it becomes uncollectable. If you claim the debt, then recover some of the money, you must report it as "other income" for the year you receive the payment. If you fail to deduct the debt in the year it went unpaid, you can file for a refund up to two years after you paid the tax for that year, using a 1040X form.

Considerations

If your total rental expenses, including unpaid rent, result in a net loss on the property, you may be able to deduct the loss from your non-rental income. If you make personal use of the rental, and that use is more than 14 days a year or 10 percent of the time it's rented out -- whichever is greater -- you have to carry the loss over to a later year. If you use property personally and rent it out fewer than 15 days, you don't report either the income or the expenses.

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