Can You Claim Unpaid Rent as an Expense Deduction?

Landlords can write off a number of expenses to reduce taxable income, but unpaid rent is not usually a valid deduction. Unpaid rent can only be deducted if the taxpayer has already reported rent revenue and needs to reverse it. Landlords can, however, report less revenue when rent is unpaid and potentially claim a passive activity loss.

If you're a cash basis taxpayer, you can't deduct unpaid rent as an expense on your taxes. You can, however, adjust your rental revenue to reflect the fact that no rent payment was received. For example, say that you rent a home for $1,000 a month but you didn't receive a rent payment for two of the 12 months. Instead of recording $12,000 in rents received, you would record $10,000 to reflect the two months of missed payments. Landlords should report rents received on line 3 of Schedule D.

The only situation in which you can claim unpaid rent as a deduction is if you already reported rental revenue on your taxes but never received it. This can happen if you use accrual accounting for your rental business. Under accrual accounting, the business owner records revenue when the rental revenue is earned, like at the end of the month or the year. If the business owner reports revenue but never gets a rent check, he can write off the missed payment as a bad debt deduction. Landlords should report the deduction as bad debt expense on line 19 of Schedule D.

Even if rent revenue isn't coming in, it still costs money to operate a rental. Luckily, you can deduct rental expenses even when rent remains unpaid. Potential rental deductions for landlords include:

• Mortgage interest expense
  
• Property taxes
• Maintenance and repairs
• Travel expenses
• Homeowner's insurance
• HOA fees
• Mortgage insurance premiums
• Professional fees like accounting, advertising or attorney expenses.

If your total rental expenses exceed your rental revenue for the year, you'll have a passive activity loss. Passive activity losses from rentals can sometimes be used to reduce your taxable income from other sources. Real estate professionals can deduct the losses in full. As of 2015, taxpayers that have a modified adjusted gross income less than $100,000 can deduct $25,000 a year in rental losses as long as they participate in the rental business.