Let tenant deduct services rendered from rent?

52 Replies

Hi everyone,

I have heard mixed opinions on this topic and I would love some input from all of you.  One of my tenants is a licensed electrician and is willing and able to do some small jobs for me around my new rental property.  Everything will be done to code and with the proper permits.  If he does the work for me, should I let him just pay less in rent that month to cover the balance, or should I handle the rent and the payment for services as completely separate?  I can see the pluses and minuses each way, but it does seem silly for me to hand him 200 dollars so he can turn around and hand it right back to me.  I will definitely get an invoice either way so I have it for tax purposes.  Any thoughts or issues I may not be considering?  Thanks in advance!

For you it makes sense either way but if he does enough that he needs a 1099 you don't want to help him avoid taxes and get him audited I'd keep it separate even if it sounds silly.

@Lisa Kattenhorn

Our experience has repeatedly shown that trading services for rent is usually not a great idea. Besides, what does "some small jobs" mean and if they're so small, why do you need proper permits? Are these electrical jobs, or is he moonlighting as an all-purpose handyman and either way, how does this come down to $200?

It's sounds like there's a lot of story in a messy pile here and the more you stir it the more it will stink.

has always been an abject failure for us.. and sub who is a good one should own their own home not be renting from you that is first red flag.. its not like he is a handy man.. 

@Lisa Kattenhorn Is he doing just electrical work? Is he giving you a discount? Can you have the work done cheaper by somebody else? How often do you actually need electrical work done?

I don't anticipate needing a lot of electrical work done, but some examples would include installing a motion detecting light outside, or installing a GFCI outlet near the bathroom sink, or moving an electrical outlet down a few inches to accomodate the back of a new stove.  They are things I could potentially do myself but would rather let him do if he is willing.  And no, he would not need permits for that work but he has done work for the previous landlord where he did have to pull permits, so I am just saying that he could do that if it was something larger and that he is licensed and has experience.  200 dollars was just a random number I used as an example.  I haven't gotten quotes from other electricians because I don't anticipate needing enough work to make it worthwhile to get a second quote.  I am just referring to small jobs like mentioned above.

@Aaron K.   That is one thing I was considering.  Is there an amount that is legally the cut off for having to issue a 1099?  

@Lisa Kattenhorn yes I think it is $400 but don't quote me on that.

Actually upon a quick Google search it looks like it may be $600

https://www.irs.gov/pub/irs-pdf/i1099msc.pdf

@Lisa Kattenhorn Bad idea . I hate to say it but There is a reason they are a tenant and not a homeowner. If all you want to pay is peanuts then all your going to get is monkeys to work for you
@Lisa Kattenhorn I never allow tenants to do work for me. A few years ago, when I was starting out, I allowed a tenant to do some flashing on the chimney of their duplex because it needed to be done and the tenant was Spanish and didn’t speak much English but his wife said it was the type of work he did. I gave them a break on the rent over a couple of months to pay for the work. When we had a heavy rain a month later the neighbor complained about water coming in again. I came out with binoculars to try to see if the flashing was done. I asked the wife of the tenant who was supposed to do the work and she got very nasty with me and told me “ I know he did the work!” Once I pulled out the binoculars and began to look at it, her tone changed to ” I think he did the work”! He hadn’t done anything! I told her they had to pay me the back rent for the work not being done with their coming months rent and then they failed to pay their next months rent and had to be evicted. Never mix the two services. You supply a place for your tenants and your workers provide work for you. Not good to mix.

@Dale Nesmith Thanks for the feedback.  That sounds like a real headache!!  I found some info for a local handyman and may try them out instead.  Thanks!

@Aaron K. I have been a self employed contractor for the last 15 years, worked for hundreds of investors. Never ever once got a 1099 from one, whether it was $1000 job or a $25k rehab. I am also an investor myself, I would never 1099 someone that worked for me.

@Matt Michaelson you are a licensed contractor running your own business.  If this tenant works for ABC electrical and contracts with his landlord and only his landlord on the side he would need a 1099 as he would be a contract employee for the landlord.

@Aaron K. That might be a thing in Ca, but it doesn’t work that way here. If the property owner is just that, and not a Corporation or other, why would there be a need to 1099? I only receive them when I work as a sub, or have done some commercial work and got 1099’d by the company

@Matt Michaelson it is not a CA thing it is a federal thing.  The same way you get a 1099 working as a sub if you have a contract or agreement for ongoing services.  For someone that is not counting this as business income would need a 1099, I have never personally done this, but that is my understanding of reading the IRS guidelines.  It basically puts the burden on the person paying the money because they have no incentive to help the person being paid avoid taxes.

@Aaron K. I’m confused Aaron... so technically, if I go and install hardwood floors for Joe Shmo and his wife, he is supposed to 1099 me? I don’t believe this to be correct.

@Lisa Kattenhorn

I have a really strong opinion on this. I think you never, ever do it. These are a few reasons why;

1. I expect my tenants to take care of small things around their apartment/house for free. Because they live there they can fix a door knob, do lawn care, change out light bulbs, ect. I am not a personal handyman for them and they are not one for me.

2. Their is an odd sense of entitlement that they work for you. Earlier this year my dad had a handyman living in one of his places and it covered the rent with how much work he was doing. It worked out for the first few years. Then I think the guy started to FIND "problems" with my dad, and felt like he was trapped. It was bad because his housing was tied to his job. This guy was not ethical, at all, and ended up stealing a checkbook and writing around 9K in checks over a few months.

3. You are really mixing 2 businesses that have alot of grey area. Contracting is an art. You ask one contractor he will give you a bid for 37K, another it's 50K, and another its 100K (actual bids to frame my house). There is not really a clear set price for jobs. This makes it really tough to determine, "did this dude just charge me $250 for 15 minutes of work, or did they spend 2 days." By the way, no contractor will tell you they spent 15 minutes. 

It just makes it really hard. 

@Lisa Kattenhorn it does seem silly for them to pay rent and then for you to hand some of that money right back. However, there's a very good reason for doing it that way.

Let's say they owe you $1,000 in rent and you want them to do $400 in electrical work. You negotiate and agree he can pay $600 for rent in exchange for the electrical work. He pays you $600. A month goes by and the work still isn't done. You call and he tells you he's been busy at work or he was sick for a few days and is catching up or his grandma died and he had to leave the state for a week...you get the idea.

Or he tells you the work is done. Six months later his lease ends, he moves out, and your inspection reveals the work was never done! Or it was started but not finished! Or it was done improperly and you have to hire a professional to fix it!

The problem is that you've essentially paid them for work before the work is done. If they fail to do the job correctly (or at all) you are stuck with unfinished work AND missing rent. You've also blurred the lines between your Landlord-Tenant relationship.

I recommend hiring an outside contractor. If you insist on hiring your tenant, hire them like you would any other contractor and pay them AFTER the work is completed to your satisfaction.

Agree pay him for the work he does and he pays you rent. Much cleaner for all involved. 

Also, what is with the anti renter vibe here?  There are lots of reasons people would prefer to rent than buy and renting should not be an automatic “ they are losers” tag.  

@Lisa Kattenhorn We do this often with one tenant. He submits a receipt/invoice for the work he's done when he pays rent, having deducted that amount from the rent. He's lived there for 5 years and I know and trust him. I definitely wouldn't do this for every tenant.

I don’t allow tenants to do anything involving my properties.  For me I’d rather pay more then have any issues down the road. 

@Lisa Kattenhorn Anytime we tried this early on in our business it never went as planned. It sounds good in theory, but in practice it ends up being a disaster.

Thank you to everyone for your input.  I appreciate the experiences you guys have shared.

To sum it up, it seems the major concerns include making sure the work gets done before actually paying the person or deducting it from the rent (also something that would need to be done with a regular contractor) and proper relationship maintenance, ie keeping the tenant relationship separate from the contractor relationship so it isn't abused.  Also, there may or may not be some tax implications here too.  I will definitely take this into consideration as we move forward. 

@Mary Mitchell   As for the anti-renter sentiment, I completely agree.  I was a bit surprised by that too as I rented for many years when I was single and that was just what worked for me at the time.  I didn't know where I wanted to end up and the flexibility was nice.  It had nothing to do with my work ethic, skills or level of personal responsibility.  There are many reasons why someone might rent and I don't routinely ask my contractors if they own their own home before letting them do work for me. 

@Lisa Kattenhorn

I understand that you are determined to do this and I wish you the very best of luck.

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