One of the most popular methods of controlling expenses for a rental property involves the use of a so-called “maintenance/repair deductible.” In a nutshell, a maintenance deductible requires a tenant to pay to the landlord a fixed portion of most maintenance expenses at a property. The amount of the maintenance deductible is typically defined as a whole dollar amount, and it is reflected in the lease agreement.
How does a maintenance deductible work? For example, if the tenant’s maintenance deductible is $75, and the owner’s expense for repairing a faulty A/C unit is $400, the tenant would reimburse the landlord $75 upon completion of the A/C repairs and presentation of the final invoice.
Landlords use the maintenance deductibles to prevent nuisance, nickel-and-dime expenses. The concept behind the use of a maintenance deductible assumes that if tenants only knew the pain and responsibility of ownership, they would learn to be better tenants. In addition, landlords are expected to benefit by fewer, time-consuming interactions with tenants.
But exactly why would a tenant voluntarily accept a maintenance deductible? Does the tenant’s desire for a well-functioning property outweigh a desire to control his personal expenses? Would the tenant pay a maintenance deductible to repair a leaky roof? Would the tenant be concerned about active termites?
Tenants do wish to control their expenses. Therefore, at the very least, the use of maintenance deductibles now transfers the decision-making about the repairs to the tenant.
During the lease, the tenant is in the sole and unique position of observing the performance of the property in which he resides. The daily physical changes occurring at the property accumulate over time and result in the need for periodic maintenance and repairs. Will the tenant share his observations with the landlord? Under a penalty? Not likely.
When using the deductibles in lease transactions, the unintended consequences typically surface at the end of the lease. As a first sign, the perfect tenant suddenly moves out. The forwarding address for the deposit refund is a rental property nearby.
Before placing the property on the market for rent again, the landlord faces a burden of discovering unreported maintenance. The cost of hidden maintenance increases the make-ready expenses. The realized savings quickly evaporate. Poorly completed repairs must be undone at a higher cost. The cost of vacancy adds to the landlord’s losses. In addition, the previous tenant always paid the rent on time. The risk of new tenants selection pays an unwelcome visit. Are we going to be so lucky again?
The marketing process to secure a new tenant is not off to an easy start. The landlord is faced with uncomfortable questions about lack of maintenance with previous tenants. How did that information spread so quickly? Did the landlord take care of all the repairs this time around?
New tenants may reluctantly accept the landlord’s reassurance that everything is now fine. The expectations of better service disappear, however, when the new tenants discover old maintenance issues. How could the landlord miss it? The pattern continues.
The use of maintenance deductibles is a trip to the black hole of the rental property universe. The solution to profitable ownership and effective management is a zero deductible. Zero deductible encourages the tenants to fulfill their responsibility and provide reports to the landlords about the condition of the property. No strings attached. The reward to the landlord for listening to his tenants is a pattern of lease renewals and the confidence in ownership of a well-maintained property.
Tenants liability for repairs: If tenant or tenant guests caused the damage, the tenant will have to pay for the repair—though you should always coordinate the repair with the landlord.
Warranty of Habitability: to provide minimum habitability conditions.
A Virginia landlord must:
- Comply with the requirements of applicable building and housing codes materially affecting health and safety
- Make all repairs and do whatever is necessary to put and keep the premises in a fit and habitable condition
- Maintain in good and safe working order and condition all electrical, plumbing, sanitary, heating, ventilating, air-conditioning and other facilities and appliances, including elevators, supplied or required to be supplied by him
- Supply running water and reasonable amounts of hot water at all times and reasonable air conditioning if provided and heat in season
- Maintain the premises in such a condition as to prevent the accumulation of moisture and the growth of mold
There will be expanded IRS Form 1099 reporting for rental property owners starting with the year 2011. The Small Business Jobs Act of 2010 requires all individuals who own rental property to issue an IRS Form 1099 for payments relating to their rental properties.
The law (the amended version of H.R. 4853) that passed after agreements were reached between the President and Congress has a definite positive effect on 1031 exchanges. The major areas of concern were the capital gains tax rates, the tax-free exclusion amount for estate and gift taxes, and the stepped-up basis for inherited property.
First, the capital gain tax rates have remained as they were. For real estate this means they remain at 15% maximum. For estate and gift taxes, the exclusion will be $5 million per person, with a tax rate of 35% for amounts over $5 million. An important aspect of the estate tax agreement for taxpayers is that a property is inherited at the stepped-up basis. This means that while the decedent may have had a low tax basis as a result of purchases made years ago and/or exchanging, the property will be inherited at a stepped-up basis at the market value at the date of death. Thus, an exchanger can continue over the years to defer capital gains, including depreciation recapture, by doing an exchange, and then leave the property to heirs without any income tax on the deferred capital gain. Their exchanges over the years are, in fact, income tax free. The heirs will not have to pay any income tax on the previous gain as they will receive the property with a tax basis at its current market value. If they sell immediately, they probably will not have any capital gain. If they hold the property, then only the capital gain and depreciation taken while they owned the property would be taxed, unless they also do a 1031 exchange. Importantly, the bill gives some certainty to the exchange tax provisions that will be in effect until the end of 2012.
