Landlords: Here’s How to Recoup Your Losses If Tenants Missed Rent Due to COVID-19

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Businesses nationwide have suffered income losses since March due to closures related to COVID-19 and accompanying factors. These events are causing a domino effect of businesses unable to pay rent, landlords teetering toward bankruptcy, and local governments recognizing they may not receive needed property tax income.

And it was announced last month that the country officially entered into a recession as of February 2020.

Income loss from business closures caused national retail chains to pay just 58% of rent in May, slightly up from 54% of billed rent collected in April, according to The Real Deal and a report by data firm Datex Property Solutions. This is a large drop from the same period last year: In May 2019, major retailers paid 96% of their rent, the report stated.

But there are some ways landlords can try to recoup their losses.

Rental Loss Insurance

Most major property insurance carriers offer rental income loss insurance. Commercial property owners can purchase it as part of their CRE insurance. It typically is used to cover loss of income while a building is being restored. The insurance usually covers about one month of rental income, and extended coverage also can be purchased.

Rental loss income insurance may be available along with business interruption insurance, which covers loss of income while a property is closed due to an unforeseen event.

Homeowners also can purchase rental loss insurance for leased residential properties. The insurance generally does not cover rent loss due to owner negligence, such as a leak that was not fixed and caused further damage. Fire damage is typically covered, but flood and earthquake insurance often are sold separately. The insurance pays the fair market value of a rental.

Federal Tax Programs

Deductions

A federal tax deduction for rental real estate loss is available for taxpayers who own and rent property in the United States. Up to $25,000 annually can be deducted as a real estate loss if the individual’s adjusted gross income is $100,000 or less, according to Investopedia. The deduction phases out for earnings from $100,000 to $150,000. Owners with higher adjusted gross incomes are not eligible for the deduction.

Related: 7 Common Myths About Rental Property Taxation—Dispelled

Demonstrating Loss

A tax loss on rental properties due to a poor economy might be classified as a passive loss. There are passive activity loss (PAL) rules that allow owners to deduct losses if they are still collecting passive income from other sources, such as positive income from another rental property. If the passive loss is more than the passive income, the loss will be suspended until the owner has enough passive income or sells the underperforming property.

Owners also can explore whether their property would qualify for an exception to the PAL rules, allowing them to deduct rental property losses sooner.

Some owners will be helped by the recent suspension of the excess business loss disallowance rule for tax years 2018-2020. The Coronavirus Aid, Relief, and Economic Security (CARES) Act postponed the rule, which would have disallowed current deductions for losses exceeding $250,000 ($500,000 for married couples filing jointly).

Forwarding Losses

If you cannot deduct your rental loss, you can carry it forward into future tax years to deduct against future rental profits. For real estate investors, loss from rental properties is often a passive loss.

The Internal Revenue Service does not deduct a passive loss against ordinary income. However, real estate professionals usually can deduct rental losses from their income. The IRS website has more details.

Related: Your Tax Write-Offs Could Affect Your Ability to Get a Loan: Here’s How

Mortgage Services

Some mortgage servicers are allowing property owners to reduce or defer payment on mortgages if income is lost due to COVID-19. Bank of America is among those offering additional support for consumer and small business clients.

Keeping Space Occupied

Properties often trade less frequently during a recession, and filling vacancies can take longer than usual. To keep space filled, property owners and operators can work to retain current tenants. Lease renewal negotiations can begin earlier than usual.

Short-term leases also might be an option to fill space. Clear communication with tenants is important so landlords can offer tenants a top experience. Providing for tenants’ needs safely and efficiently can help keep commercial space occupied.

Pandemic-related business shutdowns have shaken the nation’s economy and left many businesses facing income losses. CRE insurance, mortgage lenders, and tax deductions can help real estate professionals keep afloat.

Are you experiencing income loss due to tenants who are unable to pay rent? How are you handling it?

Share your strategies in the comments.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.