Bartering parking space for free rent - tax implications

17 Replies

I current rent an apartment in San Francisco for $2130 and have a garage parking space for which I pay $0, as stated in my lease. My landlord wants to turn the garage into ADUs.  First he offered us (each tenant) $10,000.00 to give up our space.  Then he offered 9 months of free rent.  Are both of these scenarios considered taxable income?  I've read the IRS publications on Taxable Income and Bartering and am still unclear.  Thank you in advance. 

If you’re biggest goal is to save taxes, have the landlord reduce your rent by the fair market rent of that garage for as long as you stay there. (You could still end up under market rate on the remaining property.) You’re renting less property so your rent should go down and IMHO wouldn’t be a taxable event. 

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Account Closed

If you're selling contractual rights -- which appears to be what's going on here: consideration for consideration, the consideration you receive would generally be taxable income.

Whether it's a capital gain or ordinary income is up in the air pending a conversation with a professional.  I recommend if it's between $10,000 and $19,170 to you, you spend some of that sitting down with a CPA to come to a comfortable position.

Account Closed

First, this is not barter. Barter is "exchange of goods or services" which is not your case.

Second, I personally think that @Eamonn McElroy 's interpretation of this deal as a sale of contractual rights is taking it too far. However, you can avoid debating this topic if you follow @Bill Brandt 's suggestion of essentially renegotiating your lease to rent less for less money. Even Eamonn can't argue that this would be taxable. Never mind, he could. :)

I accept your challenge @Michael Plaks .  Here are two fact patterns that I think everyone will find more digestible:

#1: Taxpayer A leases and lives in a $2,000/month apartment used as a personal residence.  6 months into the 12 month lease, changed circumstances have made her apartment building much more attractive to the population's rental pool.  She is offered $10,000 to move out by a third party that will assume her lease and contractual rights.

Is the $10,000 taxable income for Taxpayer A?  If no, please cite the authority.

#2: Taxpayer B leases and lives in a $2,000/month apartment used as a personal residence.  6 months into the 12 month lease, the landlord discovers a new "higher and best use" for the building.  He offers Taxpayer B and all other tenants $10,000 to vacate their units immediately, although they aren't compelled to accept, as their right to the unit is guaranteed another 6 months by contract.

Is the $10,000 taxable income for Taxpayer B? If no, please cite the authority.

Thanks for your input.  I agree with the suggestion to ask a CPA!  (I have asked mine.)  I feel better also reading the comments from this community.

@Eamonn McElroy

Do you want to cite the authority for making it taxable if handy? 

Because, if we extend your logic, it would apply to this example, as well. I'm firing half my employees and only need half of my current office space. I renegotiate with my landlord mid-lease, and now I vacate half of my space and pay $2,000 instead of $4,000 per month for the remainder of the term - say 10 months. In effect, I surrendered ("sold") my contractual rights to occupy more space for a "consideration" of $2,000 savings x 10 months = $20k.

I hope you're not implying that my example creates a $20k taxable income for me.

@Michael Plaks

As you and your landlord have adverse economic interests, I doubt he'd let you out of half of your floor space without you offering consideration.  That's the difference in your example, you'd be the one offering consideration and your landlord receiving it.

As it's a business lease, most likely the consideration you offered to change the lease would be a deduction for you.

The landlord would report your consideration offered as taxable income and relet the floor space given up to make himself whole (or better than whole for his time and effort).

Originally posted by @Eamonn McElroy :

@Michael Plaks

The flush language of Treas Reg §1.61-1, as alluded to above by @Christopher Smith .

But...if you want me to go the extra mile: IRC §1241 and the related reg, and

George and Myrsini Stotis v. Commissioner (TC Memo. 1996-431, 72 TCM 704) That TC case is a really good one. 

Yes, I do want you to go the extra mile but not take shortcuts :)

The case is a good one (thanks!) but also is barely relevant to our dispute. The principle that these payments were taxable was not contested, it seems! The TP's silly arguments were along the lines that payments made to his family overseas should not be attributed to him, that a payment to his attorney should not be attributed to him etc. 

The court simply stated, as a matter of fact, that this was taxable "gains derived from dealings in property" - without an analysis and without an objection from the TP. The Tax Court almost never elaborates on issues that are not contested between the sides. And this issue is at the heart of our disagreement.

Both IRC 1241 and this case deal with payments for a cancellation of a lease. As in: I move out, and you pay me for that. I concede that the concepts of accepting a lump sum or a temporary free rent can be construed as payments for a cancellation of a lease. Debatable, IMHO, but not unreasonable.

However, @Bill Brandt had a different suggestion: adjust the lease amount. I'm willing to argue that neither element if present here: there is no payment and there is no cancellation of a lease. The adjusted lease would be at fair market value of the property minus parking. One side surrenders future rights to use property, and the other surrenders future rights to receive income. Where is the "payment"?

If you're suggesting that not having to pay rent for something you will not be renting is payment to you - then, by extension, should I be taxed on cancelling my Comcast contract? (Oh how I wish I could cancel it) What about simply downgrading my contract to the Basic package? 

One step further. If my employee quits and I no longer will use her services, should I recognize income equal to her future unpaid salary because I'm now relieved from having to pay her? Is this example absurd enough to illustrate the issue I have with your reasoning?

@Michael Plaks

"The case is a good one (thanks!) but also is barely relevant to our dispute."

Respectfully Michael, if you don't think what I cited is relevant nothing I cite will be able to change your mind.  They're absolutely relevant.

"The principle that these payments were taxable was not contested, it seems! The TP's silly arguments were along the lines that payments made to his family overseas should not be attributed to him, that a payment to his attorney should not be attributed to him etc. The court simply stated, as a matter of fact, that this was taxable "gains derived from dealings in property" - without an analysis and without an objection from the TP."

And did you ever think why it wasn't contested or objected to by Stotis or his attorney?  I wonder why...  Perhaps because statue, regulation, and case law are explicit and clear regarding the issue and it's a non-starter of an argument.

"Both IRC §1241 and this case deal with payments for a cancellation of a lease. As in: I move out, and you pay me for that. I concede that the concepts of accepting a lump sum or a temporary free rent can be construed as payments for a cancellation of a lease."

So a taxpayer needs to cancel an entire lease for IRC Sec 1241 to apply correct?  If yes, please reconcile this excerpt from Treas Reg §1.1241-1(b) with your assertion taking into consideration OP's fact pattern:

The term "cancellation" of a lease or a distributor's agreement, as used in section 1241, means a termination of all the contractual rights of a lessee or distributor with respect to particular premises or a particular distributorship, other than by the expiration of the lease or agreement in accordance with its terms. A payment made in good faith for a partial cancellation of a lease or a distributorship agreement is recognized as an amount received for cancellation under section 1241 if the cancellation relates to a severable economic unit, such as a portion of the premises covered by a lease, a reduction in the unexpired term of a lease or distributorship agreement, or a distributorship in one of several areas or of one of several products. Payments made for other modifications of leases or distributorship agreements, however, are not recognized as amounts received for cancellation under section 1241.

"If you're suggesting that not having to pay rent for something you will not be renting is payment to you - then, by extension, should I be taxed on cancelling my Comcast contract? (Oh how I wish I could cancel it) What about simply downgrading my contract to the Basic package?"

Again Michael, I'm trying to be respectful here but you're missing the essence of the transaction, which is the sale of contractual rights.  The examples you're making up do not deal with the sale of contractual rights which makes me think you're not grasping that basic idea.  You're comparing apples to oranges.

If we're not on the same page at this point I'll have to bow out.  Not enough hours in the day.

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@Michael Plaks

Ask yourself:

What it be easier to agree with Eamonn if OP had two different leases for the apartment and the parking space, and was paid to $10,000 cancel the parking space lease?

If your answer is "yes" then we're on the right path.

OP's fact pattern is that she has two severable and distinct premises under one lease and is being paid to give up her contractual rights to one of those premises.

Originally posted by @Eamonn McElroy :

@Michael Plaks

Ask yourself:

What it be easier to agree with Eamonn if OP had two different leases for the apartment and the parking space, and was paid to $10,000 cancel the parking space lease?

If your answer is "yes" then we're on the right path.

OP's fact pattern is that she has two severable and distinct premises under one lease and is being paid to give up her contractual rights to one of those premises.

We stopped talking about the lump sum $10k long ago. Now we're (actually, only I am, since you never caught up) talking about dropping the monthly lease amount to exclude parking. And you never addressed it. 

@Michael Plaks

I addressed it several posts ago Michael.  Please take time to read and digest the sources I cite.

Treas Reg §1.61-1(a):

Gross income means all income from whatever source derived, unless excluded by law. Gross income includes income realized in any form, whether in money, property, or services. Income may be realized, therefore, in the form of services, meals, accommodations, stock, or other property, as well as in cash. Section 61 lists the more common items of gross income for purposes of illustration. For purposes of further illustration, §1.61-14 mentions several miscellaneous items of gross income not listed specifically in section 61. Gross income, however, is not limited to the items so enumerated.

I'm going to bow out and wish you a good weekend now as you're getting snippy, have not offered any authoritative support for your position, and have started using ad hominems.  Your posts are starting to read less like someone who wants to be correct, and more like someone who just wants to win.

If you want to take a position contrary to a code section, regulation and TC case, that's fine, but I hope you speak with your client about the risks and adequately disclose the position to mitigate both your and your client's penalty exposure.

Best of luck Michael.

Account Closed

Did you CPA agree with the suggestion offered by @Bill Brandt
"have the landlord reduce your rent by the fair market rent of that garage for as long as you stay there."

Yes, he essentially said something to that effect, but I do not think that this is his area of expertise.  I've truly enjoyed reading this thread - thank you.