Income or Not

[Patrick Michael]

Taxpayer owns several two family rental properties.  The village where they are located wanted to reduce the number of two family homes so they paid an "Incentive" to property owner's who converted two family homes back to single family homes. Taxpayer received a 1099 MISC from the village for the amount of the incentives in box 3, which is significant.  I do not believe this is income and the 1099 should not have been issued.  I believe this should be a reduction in basis.  However, my research has failed to find anything to back up either position.

Has anyone else run into this or similar situation?

[schirallicpa]

It is income but would be offset by the expenses of converting the house to single family.  I suspect his regular rental income is reduced (from 2 payees to 1) so this would make up for it.  Why would the basis of the house be reduced?  The cost that has gone into the house should not be negatively impacted by an incentive to change the "type" of house it is.

 

[Pacun]

It seems to be rental income on the houses "converted" to single family occupancy.

The incentive was only given to renters or owners, correct?

I would also think of this as a portion being advanced rental income. So technically the house will be partially rented in the future if the houses are idle for any reasons.

[jklcpa]

17 minutes ago, schirallicpa said:

would be offset by the expenses of converting the house to single family

Capitalization may come into this if there are significant upgrades or additional features that were never there before, or that are betterments or restorations that would extend the useful life of the property.

[Patrick Michael]

 Some additional info I probably should have included.   There is no requirement that any renovations have to be done, just sign off on a new C of O changing to single family residence.  He is planning on rehabbing it back to a true single family but can't start until the other tenant's lease is up in October 2022, so no expense to wash out the "income" this year.  And, even if he did the renovations in 2021, he will have to capitalize the improvements, writing off the expense off over 27 1/2 years. The additional income in 2021 is going to push him into 22% bracket, with most of it in that bucket.  Maybe I'm grasping at straws her trying to help him out.  He already has cash flow issues and this certainly will not help.  

[schirallicpa]

Well -  then it reduces the capitalized expenditures.  It's either income or reduced cost of capital expenditures.  But it doesn't reduce the current basis. 

 

[DANRVAN]

23 hours ago, Patrick Michael said:

I believe this should be a reduction in basis.

I don't see an argument for basis reduction.  He did not incur a forfeiture or reduction in capital as in the case of an easement or involuntary conversion.  Therefore it looks like taxable income.

The amount he will spend on making the conversion will add to his basis; in a separate transaction.

[DANRVAN]

20 hours ago, Patrick Michael said:

Maybe I'm grasping at straws her trying to help him out.  He already has cash flow issues and this certainly will not help.  

Unfortunately, it sounds like he did not seek tax advice until after the fact; and the incentive money he received has all been spent?

[Patrick Michael]

On 1/26/2022 at 10:16 AM, DANRVAN said:

Unfortunately, it sounds like he did not seek tax advice until after the fact; and the incentive money he received has all been spent?

LOL.  They never call before hand and then it's your fault they have to write the check!