Utilities rental property

[jiri-zbranek]

Renting a property located outside of US always brings some unique tax challenges. In my case, the tenant is responsible for utilities, per rental agreement where we separated the monthly rent and the monthly utility payment. However, the tenant does not pay to the utility companies directly, he sends the utility payment to my account with the rent. I forward those utility money to the utility companies, so I’m sure that utilities have been paid for. The utility company sends me a settlement bill once a year, based on the utility meters. At that time I forward the bill to my tenant and return him whatever he overpaid, or I ask him to pay extra if he underpaid on utilities. The question is: Shall I report those tenant utility payments passing through my account as my income and my expenses? I’m in the opinion that it is tenant money just passing through my account and I either pay them for the tenant or return them back to the tenant, so it should NOT be reported as my income nor my expense and they always net zero at the time of the annual settlement bill, which I can prove with my record keeping. Similarly to security deposits that are also not reported as income when received nor expense when returned back to the tenant. Can somebody confirm?

[CathiM · Accepted solution]

The utility payments passing through should be reported as income when you receive them and expenses when you pay the utility company. You need to account for the cash you received and the cash you paid out. Since they are a wash, they will not affect your taxes.  

Security deposits held are not reported as income nor expense. 

Here is a link for more information: https://www.irs.gov/businesses/small-businesses-self-employed/rental-income-and-expenses-real-estate...

[jiri-zbranek]

Hello Cathi, I agree that it is a wash, but not necessarily in the same tax year, since I receive the rent and utility money before the end of month and pay the utility after the beginning of next month. Are you sure that it really is my income and expense from the income tax perspective? My logic says that I’m just paying someone’s else expenses per agreement and this is not a paid service to my tenant, so it does not qualify as income/expense. The example in your link describes the case when “Under the terms of the lease, your tenant does NOT have to pay this bill.”, which is not my case. My lease terms clearly state that the tenant is responsible for all utilities and we just agreed on a specific way how he pays them through my account. Thank you very much for working with me. I’d like to have it right.

[CathiM]

Thank you for your reply! Although it clearly states in your lease that the tenant is responsible for utility bills, the payments more closely resemble "advance utilities". The treatment of "advance rents" is to record them as income when received, regardless of the period they cover.  I do understand your position, but security deposits are the only case where the IRS states to not treat payments as income. In that case, they are intended to be returned to the tenant at the end of the lease (Pub 527 page 3).  I would still recommend recording the utility payments as income when received and expenses when paid.

[RWM-001]

It may be too late, but I agree with you that the tenant utility money is not your money, therefore you don't report it as income.  This is based on the terms of your lease agreement.  You have a legal obligation to pay the utilities with funds received from the tenant.  Your legal justification for not reporting utility payments as income is sound.  Legally, you do not have a claim of right on the funds.

[Carl]

It may be too late, but I agree with you that the tenant utility money is not your money,

Yes it is your money.

All income received for rental property from any source for any reason is included in the total amount of rental income received in the tax year. Period. (That includes a rental property insurance payout too!)

All rental expenses, including utilities paid for a rental property by the owner of that property are deductible rental expenses. In fact, the rental expenses section has a box in it specifically for utilities cost.

So while it may be a wash, you are still required to include it in the rental income.