How do rent discounts affect taxes vs value

Question

In one of the podcast episodes, I remember them saying that if you are trying to avoid raising rents too high on an existing tenant, you are better off renting at the full amount you can and then giving them a discount on the rent. The idea was that it makes your property more valuable. But I wondered how this affects taxes.
Do I report the full amount I am "charging" and then somehow show that I collected less due to the discounts?
Or do I just take a small hit on my taxes because I am essentially claiming that I am collecting more than I am?
Or do I only report what I actually collected and ignore the fact that I am "charging" more?

An example. The rent is $1500. I give the tenant a $100 discount if they handle the lawn care/snow removal themselves. So I only collect $1400 a month but they technically are being charged $1500 with a $100 discount.

Even this seems like it could be done in a couple of ways. I could collect the full $1500 and then return the $100 each month. But that seems like a lot of busy work. I could also just only collect the $1400.

Thank you!

John Clark · Answer

Wouldn't it be more accurate to say that the rent is $1,500 and report that, but claim $100 in expenses every month for maintenance?

Remember, the tenant is getting the discount because the tenant is rendering a service ($100 for lawn care, etc.), so that $100 is actually making a round trip. What if the tenant stopped doing the lawn care?

Jonathan Feliciano · Answer

@John Clark

Like most answers involving taxes, it depends. A good rule of thumb is to follow what’s reported on

your bank statement.

For example, if your monthly bank statement shows $1,500 rental income (deposit) and a $100 expense (withdrawal), then yes. Report yourself as receiving $1,500 in rental income and incurring a $100 expense. Personally, I wouldn’t call the $100 withdrawal a “discount,” but rather “lawn care expense.”

Bill B. · Answer

It MIGHT affect how much you can borrow with a DSCR loan if you're not lying. But it doesn't affect the value at all. They're going to want to see leases or underwrite it well below what they think it can rent for. You can't just inflate it 20% and then offer a 20% discount. But again, doesn't affect value at all.

By the time you’re paying those inflated rates you should already have 10 golden ticket loans. Good luck and congrats on getting started. That’s the hardest part.

Seth McGathey · Answer

Thank you! And yea, I guess I was conflating value and lendability. Thanks for the feedback!

Seth McGathey · Answer

Thank you! This is exactly what I was looking for!

Jonathan Feliciano · Answer

@Seth McGathey

Hi Seth. This is my opinion as a CPA who has prepared hundreds of income tax returns for both individuals and businesses with rental properties.

To answer your question directly, you report the rental income you ACTUALLY received.

It does not matter what you advertise as your rental listing price. At the end of the day, what truly matters is the rental income that enters your bank account. That is what the IRS cares about.

Now, there are different reporting methods you can implement here. But I think the simplest and easiest method would be reporting $1,400 per month. It would be extra reporting work to say you had $1,500 in rental income and $100 in discounts every month.

I hope this helps.

Seth McGathey · Answer

I thought with DSCR loans it made a big impact, regardless of the property type. Am I wrong with that? (I also don't know for sure if that is the route I will go, but I wanted to take it into consideration.) Also, I believe even outside a DSCR loan it still affects your loanability with other loans as well because it affects your Debt to loan ratio. (Although, I could be wrong on that since I am not actually getting that money). As far as the PM side I am not confident in the value of that right now. I use rentometer to help me price the rents for my properties. With this one, I feel pretty confident I have it right because of the amount of interest I have received. I am getting 1-3 requests a day to see it. Some legit interest and some feel it is overpriced. So I feel I am right in the pocket I want to be in. But as I continue to grow my portfolio, I do intend to bring in a PM at some point. Especially on properties much more stabilized than this one.

Bill B. · Answer

Higher rents (Really higher Net Operating income. Higher stated rents mean nothing.) increase the value of commercial properties. (5+ units). It does nothing for the value or the property taxes of residential properties. (4 or less units.)

Don’t worry about an LLC, don’t worry about this way to increase the value. When the current tenant’s lease is over ask your PM what market rents is. Then offer that rate to the current tenant with the PM’s lease to get out of any errors in the old lease.if they move out fix it up, take pix, advertise, and move on.

Ps. Why did I say your PM when you’re going to respond with you don’t have one? Because you are literally guessing at market rent and the PM will…

1) keep your application and denial process legal

2) advertise, screen and place the new tenant faster and better

3) probably save you more money than they cost you.

Good luck.

Seth McGathey · Answer

I own it directly. I actually just closed on it Wednesday so I have not filed taxes on it before. I have considered moving it to an LLC though as I am up to two rentals myself as well as one under a partnership. But for this property I have a tenant that came with the property. She has already been great so far communication wise, she keeps the place spotless, and she has lived there 5 years, making me her third landlord while she has lived there. So I want to give her a bit of a break. But I also don’t want to devalue my property by undercharging. So I figured I would give her a few discounts to justify her rent being lower than whatever tenant I get in the second unit. (Her rent will still be going up, just not up $900 like it would have).

Sean O'Keefe · Answer

@Seth McGathey Is this rental owned by an entity (e.g. LLC, S-Corp, etc) that files a tax return or do you own it in your personal name and report rental income on IRS Schedule E? Don't be stingy with the details.

How do rent discounts affect taxes vs value

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