Deducting Rent Payments

Keywords that should come to your mind is “reasonable in amount”.   If you are renting from your family or friends than you should ensure that rent is a reasonable amount.  This is very important but not as important if you don’t know the landlord at all.  What is a reasonable amount you may ask?  Reasonable amount is any amount that will be paid by an unrelated party.

Rent paid for property used for business are deductible.  This also includes any additional expense you may have on behalf of your landlord.  For example, you may deduct property taxes as part of your rent payments providing your lease terms require you to do so.

What if the property you are renting is owned by a corporation in which you are major share holder?

This is where rent expense can get tricky.  Once again number one rule is that Rent Amount should be reasonable, but you can not teat the rents as passive income that you could use to offset your losses from other passive activities. This kind of transaction is strictly prohibited by the law.

Rent with Option to Buy?

This kind of arrangements are great but sometimes it may not be clear if payments made are “Rent Payments” or “Down payment”  for the purchase of the car.  Make sure agreement clearly states what payments will be treated as rent and what will be considered as purchase or down payment.

Payments are not- deductible as rent if they are made under “conditional sales contract” which states that you will acquire the car after making the certain number of payments.

For example  You lease a car for a period of three years.  Your lease agreement provides that at the end of three years you have an option to buy the car and all payments made to date will be applied towards the purchase price.  In this kind of situation, your payments will mostly likely be considered as purchase rather than lease payments.

Can you deduct advance rent payments?

No – you can not.  You can only deduct the portion of the rent that applies to use of the rented property during the year.

Cost of cancelling the lease?

This is a deductible expense.

Improvement made to leased property?

Improvements you make to leased property ? This can be tricky calculation.  Please make sure to consult a professional.  You can deduct the improvements. However, improvements are depreciated over their recovery period defined by the law.  Please note that you can not depreciated over your term of the lease.

Renting a portion of your home for business?

You can deduct the rent expense as “home office deduction”.