Cash for Keys Tax Deductible?

Question

Hi BPers,

@Joshua Smith and I both recently bought properties and had to pay off tenants with cash for keys agreements. To me, it seems like one could argue that this is a property expense and could be deducted as an expense.

@Brandon Hall you might be more in tune with this. More specific to the DC market, one of the properties had quite a large TOPA payoff to the tenant that occupied it. One of the terms of the TOPA payoff was that the tenant vacate the property, so this served the purpose of cash for keys as well.

Thanks!

Aaron

Basit Siddiqi · Answer

@Aaron SmithAre you doing cash for keys to get the tenants out so you can demolish the building or to put the building through extensive rehabilitation?

This might have to be capitalized to get the unit ready for its intended use.

Michael Plaks · Answer

@Aaron Smith

If it was your current delinquent tenant - then I'd consider it deductible, similar to a rent refund. If it was an "inherited" tenant being evicted at the time of purchase - then I agree with @Basit Siddiqi: it should be considered part of acquisition costs, added to your tax basis and depreciated.

@Kyle J.

I disagree with the discussion you quoted re: sending 1099s to displaced tenants. This is debatable (as in "grey area"), but I would not issue 1099s in this situation.

Thomas S. · Answer

You will need to run that by your accountant. Not sure there is a tax deduction line for bribes. Possibly hide it under miscellaneous expenses or subtract from total rental income.

Bribes may be part of doing business but fall into a grey area in regards to actual legitimate expences. Except possibly in CA where buyouts are legislated.

Carl Fischer · Answer

@Aaron Smith

Seems similar to eviction costs in my book.

Michael Plaks · Answer

I don't believe that the landlord is required to issue a 1099 - as the linked forum discussion implies. And a 1099 does not affect his ability to deduct it.

Kyle J. · Answer

I've never had to pay a tenant cash for keys, but I'm curious after reading that discussion why you'd disagree?  Suppose a landlord had to pay a tenant $1000 to move out.  Is there any benefit to the landlord issuing a 1099-MISC to the tenant for this payment?  Maybe just to help verify that the money was paid and further substantiate the write off?  I'd never thought of it before until I read that online discussion, but I'm curious about your thoughts on the matter.

Kyle J. · Answer

What about issuing the former tenants a 1099 for the money paid to them, similar to what's discussed here: https://money.stackexchange.com/questions/54104/is-it-legal-for-a-landlord-to-report-a-large-payment-to-a-tenant-using-form-1099

Cash for Keys Tax Deductible?

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