Claiming Tenant Buyout Agreement as Rental Expense for Tax Filing Questions

[Kyla B.]

1. Are Tenant Buyout Agreement payments eligible to be claimed as rental property expenses for tax purposes?

2. Does anyone in the community have practical advice/insight on this?

Background:

My partner and I are negotiating a Tenant Buyout Agreement with our rent-controlled tenant in Berkeley, California.  The apartment is rent controlled with a long-term tenant who pays well below market rate.

In my online research, it does appear that a Tenant Buyout is a valid rental property expense according to the IRS as long as it is 1. "ordinary and necessary" for the production of rental income and 2. for a reasonable amount.

I think the case for both of these should be easy to make.

We are on good terms with the tenant and expect to obtain a Buyout Agreement before the year end. The way we are structuring payment is a lump sum payment after signing rescission period ends (30 days), another lump sum payment at tenant moveout, and then monthly payments over the next 48 months.

It seems this expense would go in the "Other" category of schedule E.

Also since the payout expense will occur in multiple tax years, my understanding is that the expense should be claimed in the year it is incurred.  Is this reasonable?

I will discuss this with our accountant as well, but thought the Bigger Pockets community  would be able to offer valuable expertise.