How to report a 'grant' from a state from 1099-G

[ode923]

Hi all. Happy tax season to everyone.

A client bought a property in an economically depressed area. He remodeled and upgraded it, and now rents it out.

Thanks to the economic revitalization he provided by refurbishing the house, the state gave him a grant for his investment/improvement in that property. The state then issued him a 1099-G with the value of the grant in Line 6.

My client paid another professional who is familiar with these grants to help prepare and file that grant application.

The client will want me to report both the grant and the grant-preparation expense on Schedule E, as income and expense, respectively.

The client is arguably a real estate professional, but he hasn't really claimed that designation in years past.

My reaction is to report the grant as "Other Income" on Line 21 of the 1040, not Schedule E. As for the professional fee to obtaining the grant, I'm not sure at this point how I'll deal with that.

Has anyone dealt with something like this before? Thanks in advance!

[Lee B]

Several years ago I had a client receive a grant from the state of Oregon to partially offset the cost of noxious weed control.

My client's expenses exceeded the grant. I reported the grant amount on 1099 G on Line 21.

Since my client was not a farmer and the acreage involved was attached to their residence, the expense was personal.

[DANRVAN]

Since the grant is directly related to a real estate rental activity, then why not report it on Schedule E and deduct the related grant expenses?

As   cbslee pointed out, if it involved a farming operation it would go on Schedule F, so why not E  (real estate professional or not)?

[ode923]

22 hours ago, DANRVAN said:

Since the grant is directly related to a real estate rental activity, then why not report it on Schedule E and deduct the related grant expenses?

As   cbslee pointed out, if it involved a farming operation it would go on Schedule F, so why not E  (real estate professional or not)?

Thank you cbslee and DANRVAN. 

I have reluctance applying this grant as income on a Schedule E. On Schedule E you report rental income. The IRS defines rental income as:

1) Rent

2) Payments to cancel a lease

3) Expenses paid by tenant

4) Property or services received as rent

5) Security deposits kept if tenant doesn't live up to terms of the lease

That's it. 

In this case, it's a grant that was awarded to the client for revitalizing a dilapidated property that they rent out.

Farm Income (Schedule F) is far more broad and includes a whole bunch of possible categories. Schedule E is quite narrow in comparison--rents, and royalties, and that's about it.

Does that change your answer at all?

 

[Lion EA]

It still has to do with the rental. Does it subtract from the basis? Reimburse for renovation costs? Reimburse for repairs &/or maintenance. Is it a contra-account of an expense account? Would he have received the grant if he didn't rehabilitate the property on his Schedule E?

[DANRVAN]

17 hours ago, ode923 said:

Thank you cbslee and DANRVAN. 

I have reluctance applying this grant as income on a Schedule E. On Schedule E you report rental income. The IRS defines rental income as:

1) Rent

2) Payments to cancel a lease

3) Expenses paid by tenant

4) Property or services received as rent

5) Security deposits kept if tenant doesn't live up to terms of the lease

That's it. 

In this case, it's a grant that was awarded to the client for revitalizing a dilapidated property that they rent out.

Farm Income (Schedule F) is far more broad and includes a whole bunch of possible categories. Schedule E is quite narrow in comparison--rents, and royalties, and that's about it.

Does that change your answer at all?

 

 

It is an unique situation and although it would benefit the client by reporting on E, off the top of my head I can't think of any justification for reporting the grant as rent.  My gut instinct was to report it on E since it was directly related to the rental activity, 

As far as that goes, If the grant had been made to remodel a barn,  I would think twice about putting it on Schedule F subject to SE tax.

No clear answer that I can see.

17 hours ago, Lion EA said:

It still has to do with the rental. Does it subtract from the basis? Reimburse for renovation costs? Reimburse for repairs &/or maintenance. Is it a contra-account of an expense account? Would he have received the grant if he didn't rehabilitate the property on his Schedule E?

 I don't believe you could make a basis adjustment since there was not a disposition of property.

 

[PapaJoe]

I agree with Lion. I'd treat it as a reimbursement or offset to renovation cost which will reduce depreciable basis.

[DANRVAN]

28 minutes ago, PapaJoe said:

I agree with Lion. I'd treat it as a reimbursement or offset to renovation cost which will reduce depreciable basis.

Do you have a cite to back that up?  I think case law would prove otherwise off the top of my head.