Postponing rent collection to lower taxes

27 Replies

I need to lower my rental income for this year due to some other income coming in.
I know I can prepay certain expenses at the end of the year since I do cash based accounting. Now I am wondering if would work to have my tenants
post date their December 2015 rent to be Jan.1 2016.
I realize this would make my rental income higher for 2016.

@Luna Baron they could but than you would have to take the money out in jam too so now they would be hit with double payment. While this works in theory I would be very concerned that with the holidays the rent wouldn't be paid. I am all about paying as low in taxes as posisble but I am also all about treating this as a business. Rent payment is not something I personally would mess with! 

Originally posted by @Luna Baron :

I need to lower my rental income for this year due to some other income coming in.
I know I can prepay certain expenses at the end of the year since I do cash based accounting. Now I am wondering if would work to have my tenants
post date their December 2015 rent to be Jan.1 2016.
I realize this would make my rental income higher for 2016.

 Could you collect them in December, but not deposit them until Jan?  That way, you aren't un-training your tenants.  You'll get some calls wondering why you haven't cashed the checks yet, though.  Not sure if that's allowed.

Otherwise, is there any type of expense that would translate into enough of a deduction to make it worth it?  Time to do some painting?  Replace appliances or anything like that?

Originally posted by @Elizabeth Colegrove:

@Luna Baron . Rent payment is not something I personally would mess with! 

 LOL. I thought you were going to say taxes is not something I would personally mess with.

@Account Closed I legally mess with my taxes all the time with my CPA's blessing and signature! There are many legal loop holes! 

I have amazing tenants but I have worked hard to create a tenant/landlord relationship . I think this would discredit more than it would help. Just think of the long term affects on your tenant landlord relationship if it's worth it. 

I'm not sure I understand the mindset of purposefully trying to lower income in order to pay less taxes. Are you really going to end up with more money by making less? Also, wouldn't this fall under the category of tax evasion(as opposed to avoidance)?

Never, never interfere with the flow of income, one thing you will give your tenants the wrong message, and due to the laws of nature it is likely to come back and bite you in the rear. This applies to things other then rent also.

 Don't lower your income, consider increasing your expenses, Those kind of years I would buy a new car, computer, something used in business for all cash and a tax deduction with the blessing of the IRS. Don't know the current tax law but I'm sure there is something there.

I used to have one C corp for the benefits it provided and it was possible to buy other C corps with large losses and lower the tax bill a lot. The side benefit was I could sell off their real estate down the road and whatever else and then dissolve them, saved on taxes and made a buck down the road.

Tax avoidance is good, tax evasion is what got Capone put in jail. 

If it's cash accounting, do exactly that, get everyone to pay in cash, and bank it in January.

I would not take checks and hold them for 30 days unless you like bounced checks and pissing people off.

I try and pay end of year bills on the 2nd or so of January also, but wouldn't mess with rent. In my s-corp I'm allowed to fund a defined benefit retirement plan up to $30k/yr. Contributions are deductible from income like a 401(k) or traditional IRA. Sounds like a more permanent solution. Gonna ask them to hold 2 months in 2016? As you mention @Luna Baron , every following year there will be even more income to try and defer! Perhaps there is a loss down the road your are waiting for to offset?

@P.Martin this isn't lowering my income, it is postponing if for one month to put it into the next tax year. If the income is claimed it is not tax evasion.

Originally posted by @Luna Baron :

@P.Martin this isn't lowering my income, it is postponing if for one month to put it into the next tax year. If the income is claimed it is not tax evasion.

 I wouldn't want to argue that with the IRS, because there will be a benefit to you in the 2015 tax year by not declaring it, and that benefit is a lower tax bill, regardless of whether you add it to the following year. Therefore, you could argue, and an auditor probably would, that it was a form of evasion rather than avoidance. (Avoidance is legal).

Essentially you are padding your tax years to seek benefit, and that has to be illegal.

Plus, it's documented "none of my tenants paid December rent on time, but they all caught it up to date in January"....yeah, not happening.

If you know that 7 months out from the end of the year you have a problem, I would look at other solutions to reduce your impending 2015 tax bill. For instance, if a property goes empty and you were expecting rents during that time - leave it empty for a couple of months - nothing forces you to keep it rented.

And here's the other thing, if you get audited, you are the unlucky 0.3%, and if a red flag is raised during the audit, you will get audited again and again. So really - is it worth the risk?

Originally posted by @Sue K. :

I need to lower my rental income for this year due to some other income coming in.
I know I can prepay certain expenses at the end of the year since I do cash based accounting. Now I am wondering if would work to have my tenants
post date their December 2015 rent to be Jan.1 2016.
I realize this would make my rental income higher for 2016.

 Could you collect them in December, but not deposit them until Jan?  That way, you aren't un-training your tenants.  You'll get some calls wondering why you haven't cashed the checks yet, though.  Not sure if that's allowed.

Otherwise, is there any type of expense that would translate into enough of a deduction to make it worth it?  Time to do some painting?  Replace appliances or anything like that?

 I kinda suspected somebody would bring this up.  As a cash basis taxpayer, you recognize income when you have constructive receipt.  That includes checks received, but undeposited.

This also applies to collecting "cash" and not depositing until January.  You have constructive receipt in December, so that is where you should recognize the income.

Medium cluebussol logo3inLinda Weygant CPA, Clue Business Services, Inc. | [email protected] | Podcast Guest on Show #244

@Luna Baron

 Here is what I would recommend for lowering your taxable income:

1.  As others have suggested, do some repairs to the properties.  Upgrade appliances, put in ceiling fans, fix EVERYTHING that needs fixing.

2.  If you have earned income, maximize your retirement contributions if you are not already.

3.  To reduce state income taxes (but not federal, unfortunately), consider whether a College 529 plan makes sense for any dependents you may have.

4.  If you have bonus or commissions at work, ask them to defer paying you until January.  Those are acceptable deferments.  Rent payments - not so much.

5.  If you've got a medical procedure you need to have done, but have been putting off, see if it will make sense to have it done now.  These cannot be elective procedures such as plastic surgery, but can be things like smoking cessations programs, dental work, laser eye surgery, braces for children, etc.

6.  Increase your charitable contributions.  This might be a great time to clean out the garage, the attic, the basement, etc.  If you've got a vehicle that's all paid off and have been thinking of getting a new one, consider donating it to one of the many charities that make excellent use of vehicles.

7.  Prepay 2016's property taxes in 2015.  Talk to your mortgage company about this if they are escrowing the property taxes.  This works for personal residence as well as rentals.

8.  Same with insurance

9.  If you pay the utilities on the rentals, consider prepaying them by several months

10.  Thinking about solar panels?  This might be a good idea (for your personal residence only) and you can get a pretty decent tax credit for it.

11.  If your kids are in daycare and you are not already maxing out your dependent care credit, consider pre-paying some of your day care expenses in December.

12.  Have a dog of an asset you are thinking about unloading?  Stock in some poorly performing company, perhaps?  Sell it and take up to $3000 loss.

This does have the downside of making 2016 a higher net income year than it otherwise would, but if your goal is really to focus only on 2015, these are all legal and legitimate strategies that will absolutely pass the sniff test of any IRS auditor.

Medium cluebussol logo3inLinda Weygant CPA, Clue Business Services, Inc. | [email protected] | Podcast Guest on Show #244

Prepayment is catch 22 - is it not?  Either you pay taxes this year or next. That is why it is important to budget and forecast your income and expenses for the next three years. 

Using QuickBooks - no problem.... use it.

Do you have a business plan yet?

No company avatar mediumGita Faust, Fast Trac Consulting | [email protected] | 866‑645‑3356 | http://www.RealEstateAccounting.com

Thanks everyone, I appreciate all the feedback.
To be more clear. I have a one time taxable event with an inherited annuity in 2015
that will bump me into a higher tax bracket than usual.
I am trying to defer income and increase expenses for 2015 to get myself back into my usual tax bracket.
I can afford to take a hit from this in 2016, as I will stay in the lower tax bracket.
As far as I know, I don't have the option of any retirement contributions from rental income,
and I don't have any other income that qualifies.

@Linda Weygant

Thanks for bringing up constructive receipt.
Just to make sure I understand correctly,
When a tenant paid their January rent in December, I have claimed it for the prior year as it was received during that year.
If a tenant is late with their rent, or gives me a post dated check, I do not claim the rent until it is received or deposit able, right?

I can't really comment on the rent but I  have been where you are at  and what people don't really understand is that some things trigger " extra "  taxes on top of the regular taxes -AMT etc.   If you take it all in one year it is taxed percentage wise much higher.    

For annuities sometimes you can spread them over several years even if you inherit them.  That will help with taxes, check with the account manager before you take them and make sure you understand your options.  Also if you want to shift income/expenses shifting expenses that you would be paying anyway is probably the best option, not sure that kind of income could be shifted. For expenses things like pay all your real estate taxes for the year.  You don't spend more to avoid taxes, just spend smarter. I know that wasn't your question but thought it was worth mentioning since I had experience with just that same annuity situation.

Originally posted by @Colleen F. :

what people don't really understand is 

There is also a huge lack of understanding on how marginal tax rates actually work. I've given up trying to explain it to people who just absolutely refuse to learn. Not saying this is the case here, but I've lost track of how many times I've heard people say things like "You're better off working less!" because they actually think if they earn $1 more their entire income is going to be taxed at 50%.

Could the annuity be rolled into a qualified retirement plan?

Donate more to charity this year?

Health Savings Account?

@P. Martin   yes, I should see the day when they simplify the tax system.

I usually don't go so far off topic but since you said this is an inherited annuity I will tell you our experience.  We had 3 options for putting the annuity in the recipients name - 5 years, life of the recipient, life of the original annuity holder. The tax was for the year the income was received so the 5 year annuity only 1/5 of the income was in the first year.  Options are more limited after 1 year.  This was true even though there were multiple beneficiaries. You may find managing the annuity better then trying to defer your rental income.  Also less issue for the IRS.

Originally posted by @Colleen F. :

@P. Martin   yes, I should see the day when they simplify the tax system.

I usually don't go so far off topic but since you said this is an inherited annuity I will tell you our experience.  We had 3 options for putting the annuity in the recipients name - 5 years, life of the recipient, life of the original annuity holder. The tax was for the year the income was received so the 5 year annuity only 1/5 of the income was in the first year.  Options are more limited after 1 year.  This was true even though there were multiple beneficiaries. You may find managing the annuity better then trying to defer your rental income.  Also less issue for the IRS.

I agree deferring the tax hit should be the first step.  A CPA specializing in personal/small business taxes or other tax advisor (an enrolled agent may be a little cheaper and more specialized) should be able to help with that.

If you spread the hit over 5 years, it is probably better just to keep your systems in place.  Although it may be worth looking at some improvements with a 5 year depreciation schedule, if they will have an impact on rental rates in the long-term.  

If you have no choice in the taking the tax hit - maximizing expenses is likely the best approach.  There is a bit of a limit to this approach since you will likely not be able to an overall passive loss even if there is one on paper.  Making charitable donations early is a great idea.  If you have a charity that you love, you might consider making a gift of an appreciated asset(s).

Especially if you are already in the 25% bracket - that means your looking at a maximum federal tax increase of 18.4%(14.6% + 3.8% surcharge). If you are going from 28% to 35% it is 10.8%. For $1,000/month rental you are looking at tax savings of $100 to $200 on an income stream that should produce thousands per year.  I would focus on maintaining the income stream vs. the smaller tax savings.

I don't think you want to make large scale changes, but this could be an opportunity to make some needed changes.  If you have iffy tenants, you may want to take the vacancy hit and fix the property up and re-rent if their lease expires this year.  For vacancies you could offer a discount on the 2015 rents in exchange for an bump in 2016 rents - you don't want a dramatic shock - but $300 less in 2015 for $600 more in 2016 might be appealing.

    

@Luna Baron if your lease specifies a specific date rent is due each month (i.e. the first of the month) and you don't collect on that date, I think you'd have a hard time in the event of an audit explaining to the IRS why you instead collected and reported rent on Jan. of the following year.

Additionally, how much rental income are we talking about? You may be focusing on the wrong area here. Keep in mind your rental income will be decreased by the numerous amounts of expenses investors get to claim.

I'm with @Linda Weygant on this. Find ways to tack on expenses to nullify the rental income. Repair areas of the property and buy tools (under $500 each for De Minimis) that you may need for next year. Be sure to chat with a CPA prior to making any repairs/renovations. The new IRS regs dictate repairs vs capital expenditures so you will need to get with someone who fully undersands the new regs.

Medium logo blackBrandon Hall CPA, The Real Estate CPA | http://www.therealestatecpa.com | Podcast Guest on Show #196

@P.Martin

I am paying attention to the marginal rates, and I'm not trying to earn less money, I am asking about deferring income.
I also think it's crazy when people suggest spending unnecessary money to lower tax rate.
I will make sure to do as many repairs and improvements under $500 that can be expensed, (the 2% limit rule on the safe harbor won't allow me to do a whole lot more)
I don't file Schedule A, so no on the donations, I am not eligible for an HSA, or any retirement contributions.
Don't have any dependents, and you cannot rollover non-spouse inherited annuities.

Originally posted by @Luna Baron :

@Linda Weygant

Thanks for bringing up constructive receipt.
Just to make sure I understand correctly,
When a tenant paid their January rent in December, I have claimed it for the prior year as it was received during that year.
If a tenant is late with their rent, or gives me a post dated check, I do not claim the rent until it is received or deposit able, right?

Correct.

Although there are those who will claim that there is no such thing as a post dated check as many/most banks will process it without regard to the date on the check. 

Medium cluebussol logo3inLinda Weygant CPA, Clue Business Services, Inc. | [email protected] | Podcast Guest on Show #244

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