Coronavirus Updates

Landlords: Here’s How to Recoup Your Losses If Tenants Missed Rent Due to COVID-19

Expertise:
3 Articles Written
Close up portrait of exhausted frustrated stressed handsome sad unhappy upset entrepreneur trying to take off uncomfortable blue tie formal wear isolated on gray background copy-space

Businesses nationwide have suffered income losses since March due to closures related to COVID-19 and accompanying factors. These events are causing a domino effect of businesses unable to pay rent, landlords teetering toward bankruptcy, and local governments recognizing they may not receive needed property tax income.

Want more articles like this?

Create an account today to get BiggerPocket's best blog articles delivered to your inbox

Sign up for free

And it was announced last month that the country officially entered into a recession as of February 2020.

Income loss from business closures caused national retail chains to pay just 58% of rent in May, slightly up from 54% of billed rent collected in April, according to The Real Deal and a report by data firm Datex Property Solutions. This is a large drop from the same period last year: In May 2019, major retailers paid 96% of their rent, the report stated.

But there are some ways landlords can try to recoup their losses.

Rental Loss Insurance

Most major property insurance carriers offer rental income loss insurance. Commercial property owners can purchase it as part of their CRE insurance. It typically is used to cover loss of income while a building is being restored. The insurance usually covers about one month of rental income, and extended coverage also can be purchased.

Rental loss income insurance may be available along with business interruption insurance, which covers loss of income while a property is closed due to an unforeseen event.

Homeowners also can purchase rental loss insurance for leased residential properties. The insurance generally does not cover rent loss due to owner negligence, such as a leak that was not fixed and caused further damage. Fire damage is typically covered, but flood and earthquake insurance often are sold separately. The insurance pays the fair market value of a rental.

closeup of hands clasped shielding cookie cutter in shape of house

Federal Tax Programs

Deductions

A federal tax deduction for rental real estate loss is available for taxpayers who own and rent property in the United States. Up to $25,000 annually can be deducted as a real estate loss if the individual's adjusted gross income is $100,000 or less, according to Investopedia. The deduction phases out for earnings from $100,000 to $150,000. Owners with higher adjusted gross incomes are not eligible for the deduction.

Related: 7 Common Myths About Rental Property Taxation—Dispelled

Demonstrating Loss

A tax loss on rental properties due to a poor economy might be classified as a passive loss. There are passive activity loss (PAL) rules that allow owners to deduct losses if they are still collecting passive income from other sources, such as positive income from another rental property. If the passive loss is more than the passive income, the loss will be suspended until the owner has enough passive income or sells the underperforming property.

Owners also can explore whether their property would qualify for an exception to the PAL rules, allowing them to deduct rental property losses sooner.

Some owners will be helped by the recent suspension of the excess business loss disallowance rule for tax years 2018-2020. The Coronavirus Aid, Relief, and Economic Security (CARES) Act postponed the rule, which would have disallowed current deductions for losses exceeding $250,000 ($500,000 for married couples filing jointly).

Forwarding Losses

If you cannot deduct your rental loss, you can carry it forward into future tax years to deduct against future rental profits. For real estate investors, loss from rental properties is often a passive loss.

The Internal Revenue Service does not deduct a passive loss against ordinary income. However, real estate professionals usually can deduct rental losses from their income. The IRS website has more details.

Related: Your Tax Write-Offs Could Affect Your Ability to Get a Loan: Here’s How

Mortgage Services

Some mortgage servicers are allowing property owners to reduce or defer payment on mortgages if income is lost due to COVID-19. Bank of America is among those offering additional support for consumer and small business clients.

closed sign hanging outside a restaurant, store, office or other

Keeping Space Occupied

Properties often trade less frequently during a recession, and filling vacancies can take longer than usual. To keep space filled, property owners and operators can work to retain current tenants. Lease renewal negotiations can begin earlier than usual.

Short-term leases also might be an option to fill space. Clear communication with tenants is important so landlords can offer tenants a top experience. Providing for tenants’ needs safely and efficiently can help keep commercial space occupied.

Pandemic-related business shutdowns have shaken the nation’s economy and left many businesses facing income losses. CRE insurance, mortgage lenders, and tax deductions can help real estate professionals keep afloat.

Are you experiencing income loss due to tenants who are unable to pay rent? How are you handling it?

Share your strategies in the comments.

Ryan Letzeiser is a seasoned real estate investor and technology executive with years of experience acquiring, developing, managing, and disposing of apartments, shopping centers, and senior living...
Read more
    David M Trapani Rental Property Investor from Franklin, TN
    Replied 26 days ago
    Good article Ryan! Very timely. Recently was very blessed to receive payment on one of my insurance claims for income losses on a short term rental property due to Covid19. It wasn't easy. And, I'm told, my lawyer may be the first (perhaps in the nation) to make such a recovery. Many businesses of all kinds, whether they be contractors, builders, auto shops, hair salons, bars, restaurants, etc. may have business interruption coverage. Much turns on the language in the policy and exclusions. Restaurants in particular may have better coverage, because their policies generally cover food-borne illness and similar losses, which may extend to losses from Covid 19. We have to keep pressing ahead and do what we can to alleviate / mitigate our losses. Looking forward getting to the other side & brighter days ahead!
    Neil Aggarwal Lender from Richardson, TX
    Replied 26 days ago
    The insurance policies on my rentals all include loss of use coverage. I talked to my insurers, they said the loss coverage will only kick in if there is a covered cause. They are not considering non-payment of rent due to Covid a covered cause so they will not pay lost rent.
    Michelle Marty Landlord from Dallas, Texas
    Replied 26 days ago
    On the PPP form they had a space to claim lost rental income even for sole proprietors. I’m not sure how it works, but they did offer me money based on my lost rent.
    Bob Norris Investor from Kennett Square, Pennsylvania
    Replied 26 days ago
    Ryan, fascinating piece, thank you. Wouldn’t the loss of rental income be the same as not having a property filled or having a lower rent? Or from a tax perspective is having a lease without the income treated differently?
    Steven Rich Real Estate Agent from Panama City, Panama
    Replied 26 days ago
    I published a blog post here about how businesses may be able to make their insurance companies provide for COVID-19 (coronavirus) business income losses. But, it only lasted two days before a BiggerPockets moderator deleted it. My post cited sources and linked to them. That was considered illegal for a BiggerPockets blog post. I re-published it in LinkedIn. It mentions a recent Pennsylvania State Supreme Court ruling that COVID-19 is a "natural disaster" allowing business insurance coverage for policies listing "natural disaster". It also explains "Force Majeure" and "Civil Unrest" insurance coverage as a way to obtain COVID-19 coverage. But, I can't copy the LinkedIn URL here as its illegal. Write to me here or go to my LinkedIn profile for Steven Rich, MBA to see the article.