Tax Implications of a Tenant Requested Improvement

8 Replies

Awhile back I posted about a tenant I have that has requested to make a tenant requested improvememt to my property. Long story but to make it short, tenant has agreed to pay approximately $8400 to improve the shower stall. The bid for the improvement came in higher than expected, so I offered to carry a balance  if they agreed to pay a substantial down payment and to make monthly payments on the balance.

As it stands, the tenant will make a down payment of $4000 and I will pay the remainder with the tenant agreeing to pay an additional $500 per month until paid in full.

My question is how will this affect my taxes for this year? Technically I am loaning half of the money and being paid that amount back interest free. What startegies should I use to minimize tax implications and to get the most benefit.

I might add, the tenant is 84 years old and is retired, has been a great tenant and pays on time. Additionally, I have had a promissory note drafted with my attorney to ensure that I have some recourse if the tenant passes or fails to pay as agreed.

I have already consulted with my tax preparer, but wanted to ask the BP community to ensure that we get this right.

@Ted Klein I cannot answer your tax question but I'm not sure I'd be real excited about the shower "upgrade" if it's one of those handicap accessible showers. Yes, you may be required to make some reasonable accommodation but if it's the type of shower I'm picturing they appeal to the elderly and nobody else. I've seen one get ripped out by a new buyer on Day 1 and it may be a turn-off to future tenants if you continue to rent. I'd see what your legal obligation is with regard to allowing this and if any funds are able to be set aside to get rid of it once the tenant no longer has a use for it or moves away.

@Ryan Murdock Luckily, this is not the type of handicap accessible shower you are thinking of. This is a standard shower pan with tile walls and a sliding shower door. The tenant is still very mobile but just didn't like stepping over the tub. I had already installed grab bars in the shower and those will be re-installed in the new shower to enhance safety. So there are no plans to remove the shower installation when she moves. 

The only positive tax implication I see is you being able to claim the interest cost on the portion you put up till she pays it back assuming you had to borrow the money yourself.

No other benefit. Downside is you may have to claim tenants money as income and instillation cost as expenses for tax deduction. In the end, if you claim any of this,  you will be paying something in taxes on the tenants money.

I know how I would handle th eincome and expense but I tend to march to a different drummer.

First, I think you're being charged way too much. A four-piece shower should cost well under $1,000. Is he seriously charging $7,000 for removal and installation?

Second, this is an issue of convenience. I would not do it. What if the next tenant wants a tub? $8,000 is an awful lot of money to spend just so your tenant doesn't have to lift a leg.

Third, a payment plan wouldn't be an option either. If the tenant wants this, they can save $500 a month until they have the funds to pay me for it IN FULL and then I will hire the contractor.

As for the tax question, the cost of the shower installation should be deductible as a capital expenditure. I believe it can be deducted 100% in the year the expense was incurred but I don't know if that's the case under the Trump plan.

@Nathan G. I was originally against any changes to the property as the entire unit had just been renovated. Since the tenant is a good payer and has a regular cleaning service come in to clean the unit, I decided to work with her on the request as turnovers are costly and keeping a good tenant that is paying market rate should be a priority.

My first thought was to install a 4 piece fiberglass shower kit, however, I am not a big fan of the fiberglass kits and think that they look cheap. Given the finishes in the rest of the unit I didn't think the shower kit would be a good idea as any changes from the original should be of the same standard as the rest of the unit.

Speaking with the tenant I informed her that the kit would be $3800 installed but I wasn't a big fan and thought they looked cheap. Turns out she didn't like them either and preferred a ceramic tile shower stall. Since this is a BRRRR project, I suspected that this would improve the appraised value and would be a benefit to myself when I went to refinance.

I might add, that the unit has two full bathrooms and the master bath will be modified so I don't feel that there is a big issue with having a shower only in the master bath. Additionally, I have had my attorney draft a promissory note to ensure I have recourse in case of non payment or she passes before the balance was paid in full

The down payment is $4000 and the remainder would be paid in 9 months. This is extends past the term of the current lease but I figure if the tenant is paying for the improvement, then it is most likely that she will not be going anywhere for the foreseeable future.

I don't know enough about the Trump tax plan yet so I wasn't sure how this would work out. If anyone has studied the new tax plan and has knowledge or recommendations on how this should be handled I'd appreciate the input.

@Ted Klein,

I don't see that you have anything to expense or capitalize.  You are not paying for the shower upgrade, your tenant is.  Since the upgrade is not costing you any money out of pocket, you have nothing to expense or depreciate.  

You are giving your renant an interest free loan, but since it should be completely repaid within a year and the amount is less than $10K, I don't see any imputed interest issues for you either.

Furthermore, since the shower upgrade stays behind after the tenant vacates, you benefit from a free upgrade.  BTW, I did the same thing in my primary residence.  The master bath floor plan called for a jacuzzi style tub and a single stall shower next to the tub.  I asked for a construction modification to eliminate the tub and install a double wide shower stall with a sliding glass door.  The second bedroom suite has a full size tub, so I still meet code requirement to have a tub in the house.

Just how I see it, but confirm with your own CPA.

@Dave Toelkes I had spoke with my tax preparer and this is what she has implied. I agree, this is basically a personal loan.  I wasn't sure how this would be handled since I will realize the benefit of the free upgrade. 

In regards to your construction modification, I believe you made the right decision. When we built our house, we had a Jacuzzi style tub installed  along side of our double shower, sadly enough, the tub was used twice in 10 years but yet required regular cleanings to keep the dust from collecting in it.

@Ted Klein

I second what @Dave Toelkes said. This is essentially something that the tenant is doing with her own money and for her own benefit. You merely gave her permission to do so. There is no cost to you, so no deduction and no basis adjustment for you.

In addition, you gave her an interest-free loan - also no tax consequences for you.

If I understand correctly, she is still paying full rent, and these payments do not substitute for rent.

Basically, your tenant improves your property at her expense. Sweet.

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