Finder's Fees for Rental

[Max W]

Client pays a $4500 finder's fee to rent her property.  Is it deductible?  should it be amortized? 

[grandmabee]

I would deduct as a professional fee.  Is this a lease or straight month to month rental?

 

[Max W]

18 minutes ago, grandmabee said:

I would deduct as a professional fee.  Is this a lease or straight month to month rental?

 

It is a lease.

I took the finder's fee as it is like advertising to rent, just more expensive.

[Gail in Virginia]

35 minutes ago, Max W said:

It is a lease.

I took the finder's fee as it is like advertising to rent, just more expensive.

I think I would treat this as a commission paid.  And it might depend on how long the lease is as to whether I would amortize it. 

[Max W]

It really doesn't matter what it is called as long as it is deductible.

[Lion EA]

Did she send a Form 1099-MISC for the service rendered?

[DANRVAN]

On 5/7/2020 at 1:39 PM, Max W said:

Client pays a $4500 finder's fee to rent her property.  Is it deductible?  should it be amortized? 

First I would ask if it is an ordinary and necessary expense.  Assume it was or client would not have paid it.

Then as Gail suggested look at the life of the lease  to determine if the transaction created a future benefit and must amortized per 1.263(a)-4 (b)(iv) and exceeds the 12 month rule under paragraph (5) of the reg.

The last step is to see if it falls under the $5,000 de minimis exception per 1.263(a)-4 (e)(4)(iii).  That being the case it looks like you are good to deduct it.

[Pacun]

I would be more concerned about physical participation and QBI.

IRS can argue that this is treated as a payment to a management company.

It is deductible as a commission, as professional Fee, management company fee.

I see two issues with this transaction... if there is a loss, the loss cannot taken this year... if there a gain and no 1099 was issued, the QBI credit should not be allowed. If you want to treat a rental as a business, you have to behave as a business. Businesses are required to issue 1099-misc.

[DANRVAN]

On 5/9/2020 at 6:54 PM, Pacun said:

IRS can argue that this is treated as a payment to a management company.

I disagree.   What grounds would the IRS have to classify a one time payment to find a renter as a management fee?  A management fee is paid to third party to oversee the day to day operation of the rental on an ongoing basis.  

 

On 5/9/2020 at 6:54 PM, Pacun said:

I see two issues with this transaction... if there is a loss, the loss cannot taken this year... if there a gain and no 1099 was issued, the QBI credit should not be allowed. If you want to treat a rental as a business, you have to behave as a business. Businesses are required to issue 1099-misc.

There is not enough information given here to address those issues which are based on facts and circumstances.

 

[Pacun]

13 hours ago, DANRVAN said:

I disagree.   What grounds would the IRS have to classify a one time payment to find a renter as a management fee?  A management fee is paid to third party to oversee the day to day operation of the rental on an ongoing basis. 

 

One of the items the IRS looks for active participation is the fact that you look for tenants.

[DANRVAN]

On 5/11/2020 at 9:41 AM, Pacun said:

One of the items the IRS looks for active participation is the fact that you look for tenants.

Understand your concern, but active participation will not be disallowed solely on the fact that a fee was paid to find a renter if the owner was otherwise involved in the day to day management of the property.

In regards to the finders fee, the property owner could still be active in the process of selecting tenant, negotiating terms of lease....etc.