which is better tax deduction for water bill or tenant paid water

8 Replies

I sent a link to a friend about sub metering their water after a conversation where they were complaining about tenant water usage. Her response to me was I don't know how this could help me because the water expense is tax deductible. After more research I found out that each unit already has it's own meter and is billed to the owner. This could be billed to the tenant.  Am I wrong in thinking that passing this cost to the tenants would increase net income and ultimately the value of the property more than the tax deduction of the water expense paid by the owner? I am trying to get a better understanding of this. 

Expense     $100

Tax savings  $30  (30%)

Net Costs    $70 out of pocket

Tell your friend to send me $1,000 every week, and I'll send him $300 back :)

Yes. Tenant paid water is better. It reduces your expenses dollar for dollar.

Eventhough the water is tax deductible, it only reduces your taxes based on your tax rate so NOT dollar for dollar.

Well, tell the friend this:

Let's say that she pays 30% taxes. So, for every $ 100 she earns, she pays $ 30 taxes.  And for every $ 100 expenses that are tax deductable, she gets $ 30 back or pays $ 30 less taxes. 

That means that she'll still have $ 70 out of pocket, with a $ 100 expense. 

But if the tenant pays $ 100, she's 0 out of pocket

I thought so. Thank you

Look at this on a net cash flow basis.  If your friend is paying the water bill, she gets a deduction.  Let's say the rent is $500 per month and the water bill is $20.  Her net is $480.  If the tenant pays the water bill, she does not get the deduction, but the net is $500.  

Now in the 25% tax bracket,  her tax liability on $480 is $120.  The tax liability on $500 is $125.  Her net after taxes is $355 ($480 - $125) if she pays the water bill and takes the deduction.  Her net after taxes is $375 ($500 - $125) if the tenant pays the water bill.  

In this example, her net after tax income is higher if the tenant pays the bill.  If she plans to have the tenant pay the water bill, best to wait until she gets a new tenant to implement the change.  With her current tenant, she should raise the rent an appropriate amount to offset the cost of the water bill on the next lease renewal.  Tenants always expect rent increases, but never expect to have to pay for what they had previously received as an "amenity".

If she suspects excessive water usage, she should do a maintenance check to ensure that the problem is not a plumbing issue such as running toilet or a leaky pipe.    

I have several properties where the utility bills are in my name, but the tenant pays the bill.  In that area of the country, it costs me $25 each time I need to transfer service from a previous tenant to myself -- even for one day.  It is more cost efficient for me to keep the service in my name and just pass the cost to the tenant when I get the bill.  In practice, I pay the bill directly, then invoice the tenant for the utility cost.  

Makes sense Dave T. They are interested in selling the property and my thought was that it would be better to have the higher net income which would mean a higher ROI. I realize this would have to happen over time but it looks like it will be a while before the market catches up to what they need to get for the property. So I guess this would depend on what the exit strategy is right?

I am always amused when someone wants to have additional expenses bc it is "tax" deductible.  I recently had someone tell me they didn't want me to pay them for something I owed them for bc they needed the write off...Now if you have something you really want and you can write it off as well then great but for heaven's sakes don't go out and look for additional expenses so you can "save money" through tax deductions! :-)  

Renters on average use about 25 to 30% more water when landlord pays the bill. The tenants also do not tend to report leaks because it doesn't cost them money. Not knowing about leaks causes big damage for a landlord and reduces NOI.

The conversation about saving on taxes with deductions instead doesn't "hold water".. : )

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