Tenant reimbursement of property insurance

[chrissim2]

Our LLC paid an annual premium for property insurance in October 2021 on a commercial building.  The tenant reimbursed the LLC on a quarterly basis starting in November 2021.  We did not show the property insurance premium as an  expense in 2021 and did not include the reimbursement  in November as income.  In 2022 the LLC sold the building so there will be no annual premium due in 2022.  The tenant paid reimbursements in Nov 2021, Feb 2022, May 2022 and August 2022. 

Are the reimbursements paid in 2022 considered income?  Since we never claimed the reimbursements as income in the past and never claimed the insurance premium as an expense in the past, I believe that these reimbursements should not be considered income for 2022.  Help?      

[Anonymous_ · Accepted solution]

See https://www.irs.gov/businesses/small-businesses-self-employed/tips-on-rental-real-estate-income-dedu...

[chrissim2]

I guess my real question is:  if the LLC has not claimed the reimbursements or taken an expense deduction for the property insurance premium for approximately 3 years, can the LLC just not claim the reimbursements made in 2022 but technically count it as a "payback" rather than rental income?  It's now an issue because the tenant paid back the reimbursement over two tax years.  Help???

[Anonymous_]

I am not certain what you mean by the term "payback". 

Also, it appears as if you edited your entire original post after I posted an answer but, regardless, the payment is going to be considered income to the LLC.

[Carl]

Typically, all income received from all sources for any reason concerning rental property, is included as rental income. Period. Then all expenses paid to any vendor for any reason pertaining to the rental property, by the owner, is a rental expense. (except for qualified property improvements.)

In your case, if the payment amount received from the tenant was "exactly" the amount you paid to the insurance company, then the two negate each other out "provided" both transactions occurred in the same tax year.  If both did not occur in the same tax year, then you have a reportable transaction... be it additional income from the tenant, or an insurance premium payment to the insurance company.

[Mike9241]

@Carl @chrissim2   since this is a commercial rental the taxpayer is likely and in fact, is supposed to receive a 1099-MISC.

so they need to look at it to see if it includes the insurance. if it does then they should use that number to report the rental income and deduct the insurance payments. otherwise, there will be a mismatch which would likely generate an IRS letter.  

[chrissim2]

Hi Carl,

Thanks for the reply.  I think the LLC accountant did not show the income from the tenant every year and did not show the insurance premium as an expense because it just washed.  But in 2022 it becomes an issue because there is now no more insurance premium to be paid, even though the tenant was reimbursing the LLC for the full insurance premium paid in 2021.    I guess it'll just be more income and the LLC cannot take the insurance premium expense in 2022 becasue it was actually paid in 2021.       It's too bad that the account did not question this every year.  I guess he relied on the manager's figures, which were wrong to begin with.   Thanks for the insight!!!!

[Carl]

I understand that in prior years it was a wash for you. Technically, the payments from the tenant should have been reported as income, and the payments to the insurance company should have been reported as an expense. Doesn't matter that it washed, as you can see by the issue that has been created for 2022. Now, you have additional income to report, as well as pay taxes on.  I'm guessing that the last premium was actually paid in 2021, and you sold the property in 2022 before the next premium was due in 2022. So any additional monies collected from the tenant in 2022 would be additional, taxable rental income.