If you are a landlord, you might own a property that is in need of major maintenance and repairs. Did you know that you can enter into an agreement with your tenant to make those repairs in lieu of paying the rent? That’s right! The tenant can make the repairs instead of paying rent. So, if you have a tenant that is a bit handy, it may work in your favor to enter into this type of arrangement, especially given the unique times that landlords are living in.
How to enter into a service in lieu of rent agreement
If you enter into this type of arrangement with your tenant, the very first thing you need to do is to make sure that the agreement is in writing. After negotiating the terms of the agreement with the tenant, you should make sure that you include within the agreement the fair-market value (FMV) or the agreed-upon fee for the service. This should be outlined as clearly as humanly possible.The agreement should also outline with specificity the exact type of service the tenant will render, the number of months the service will be performed and whether or not the tenant will still owe rent upon completion of the service.
The written agreement is necessary not only for tax purposes but also in the event that there is litigation in the future. For this reason, it may be wise to use an attorney to draft the agreement.
If you decide to commence the agreement to receive service in lieu of rent, make sure you are aware the lease agreement that you entered into with the tenant has an implied warranty of habitability and the implied warranty of fitness(even if it does not specify). In short, the implied warranty requires you, the landlord, to keep the living space safe for human habitation. That means the space must be livable! These duties do not transfer to the tenant simply because the tenant decides to offer their service in lieu of rent.
Is the service receive taxable
Upon completion of the service, you will need to include the FMV of the service as part of your rental income. The value of the service will need to be included in income because this type of interaction is considered bartering.
In addition to including the value of the service as part of your income, you may also need to issue the tenant a 1099- MISC (1099-B is issued if the service was part of barter exchange).
Note: A barter exchange is an organization whose members contract with each other to exchange property or service.
Millionacres bottom line
Times are difficult for everyone. No one could have predicted these last couple of years. The good news is that tough times are what winners are made of and may be the right time to get creative. As the saying goes, innovation is the mother of invention, and landlords may have to think of new ways to receive the value of rent. If you think you're up for the task, receiving service in lieu of payment may be the strategy for you.