Should You Barter with Your Tenants for Rent Reductions?
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By Kimberly Rau, MassLandlords Writer
Bartering for rent – that is, working out an arrangement in which a renter provides service on the property in exchange for a lower payment – is a frequent suggestion to both landlords and tenants. In theory, it seems like a great idea: You, as the landlord, save money on maintenance or repairs, for example, and your tenant saves some money on rent. However, this arrangement is one that has hidden pitfalls and challenges, and must be entered into carefully.
For instance, you may not be aware that the government considers bartering as taxable income, and it must be carefully documented and reported as such. There’s also the possibility that your tenant may injure themselves while performing the agreed-upon job, and what happens then? What if your tenant damages the property or does a bad job? Or it turns out you’re unwittingly taking advantage of them?
In this article, we’ll examine some of the key things to be aware of when bartering with your tenants for rent.
Bartering cannot be done “under the table”
If you think you can just verbally agree to shave a couple hundred dollars off your tenant’s rent and get some free landscaping or painting out of the deal, think again.
The Internal Revenue Service (IRS) considers the “fair market value” of your bartering as taxable income, and expects you to report it accordingly.
“If you barter, you must report on your tax return the fair market value of the products or services you received,” states the IRS page on bartering. It goes on to say that bartering, which is taxable in the year it occurs, may subject both parties to income taxes, self-employment or other employment taxes, or excise taxes, depending on the situation. Generally speaking, though, individuals bartering as part of a trade or business will have to file Form 1040, Schedule C, Profit or Loss from Business. This is something you would also need to make your tenant aware of before you engaged in any kind of bartering.
Anyone working on your property must be covered in case of injury
Even the best, most experienced professional has the potential to get hurt while working. This is why the companies you hire to do your contracting or maintenance carry workers’ comp insurance (or they should): It protects the company and the employee.
Well, the same goes for your tenant who has entered into a bartering agreement with you. If they get hurt while performing work for you, you could be held liable for their injuries.
The Insurance Information Institute recommends looking at your homeowner’s insurance policy to make sure that non-immediate family members are covered if they are injured while working on your property (this is typically called no-fault medical coverage). You will also want to make sure your liability insurance covers whatever situation you are undertaking.
“If you hire one or more home workers on a permanent, regularly scheduled basis, consider purchasing workers’ compensation insurance,” it states. Massachusetts requires all employers to carry workers’ compensation for their employees. The only exception is for “domestic workers” who work less than 16 hours a week. Since the state does not define every type of service that would qualify someone as a domestic worker (it provides examples that are not all-encompassing), it’s important to consult with an attorney to find out what you’ll need to do to make your bartering situation compliant with the law.
“Bartering math” may not work in your favor...or your tenant’s
There are many anecdotal stories all over the Internet about landlords who lost big on bartering agreements, but there are also cases in which the tenant is getting the short end of the stick. If your tenant is coming to you looking for a way to save money on rent, they are essentially at your mercy. You could give them a lot of work to do and only offer them a pittance of savings, but that’s not really fair, or ethical.
A blog post on bartering for rent by Paula Pant of Bigger Pockets detailed why a landlord was reluctant to let a tenant work on his property in any way, and most of it surrounded the math just not adding up.
“I know a landlord in the Boston area who agreed to let his tenant re-paint the interior of their condo in exchange for one months' rent,” wrote Pant. “The landlord didn’t stop to crunch the numbers before agreeing to this arrangement. Later he realized that he’d effectively ‘paid’ (in the form of lost income) more than $1200 to paint a very small space, only a few hundred square feet.”
In another case, a judge ruled that a landlord had to reimburse their tenants approximately $11,000 for the value of their renovations after the landlord issued them a notice to quit once the work had been completed. We’ve linked the case findings, but a more broad summary can also be found here.
An attorney weighs in
Jordana Roubicek Greenman, a Boston-based attorney, who specializes in real estate and landlord/tenant issues, took some time to clarify her position on bartering for rent: Don’t do it.
“Your tenants are not your friends,” she said. “Your tenants are not your landscapers or your maintenance workers...don’t get into bed with your tenants.”
Roubicek Greenman stated that setting up a barter situation stands to create confusion for everyone involved and can possibly hinder eviction proceedings if things go badly.
“How do you value this stuff?” she asked. “Once you’ve created a habit, it can easily be used against you.” She recalled a situation where a tenant facing eviction attempted to say they could remain on the property because they were a maintenance worker, and had paperwork stating so. Bartering with your tenants, Roubicek Greenman said, creates the potential for more headaches when it comes time to file taxes, more confusion about boundaries, and greater potential for animosity if things went south. She stated that she personally would not even advocate for hiring tenants and paying them cash.
“I think it has to be separate,” she concluded. “I just think [bartering] is a bad idea.”
Bartering for rent can seem like a win-win, but anecdotal information suggests that it can create potential for trouble down the road. At the very least, it means more work for you as a landlord when it comes to the IRS. Consult with an attorney to make sure you’re doing things by the book if bartering seems like something you want to try with your tenants.