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SanFranciscoRain
New Member

What are the tax rules on money paid out to a very problematic roommate who has finally agreed to vacate for a $5000 payout? What taxes do we owe?

I've consulted with the rent board in my city and I'm following the laws around tenant buyouts. My concern is that I am paying someone for a "service" and it is more than $600. I would like to report this to the IRS. I would like him to pay taxes on the money I pay him. Is this a capital gain? Is this a winning? What category does this fall into?
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Accepted Solutions
Opus 17
Level 15

What are the tax rules on money paid out to a very problematic roommate who has finally agreed to vacate for a $5000 payout? What taxes do we owe?

It's not a service payment, it's not for work performed.  It's an incentive.  Report it using form 1099-MISC in box 3 for other income. https://www.irs.gov/uac/about-form-1099misc

*Answers are correct to the best of my ability at the time of posting but do not constitute legal or tax advice.*

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6 Replies
Opus 17
Level 15

What are the tax rules on money paid out to a very problematic roommate who has finally agreed to vacate for a $5000 payout? What taxes do we owe?

It's not a service payment, it's not for work performed.  It's an incentive.  Report it using form 1099-MISC in box 3 for other income. https://www.irs.gov/uac/about-form-1099misc

*Answers are correct to the best of my ability at the time of posting but do not constitute legal or tax advice.*

View solution in original post

SanFranciscoRain
New Member

What are the tax rules on money paid out to a very problematic roommate who has finally agreed to vacate for a $5000 payout? What taxes do we owe?

So- I don't have his tax identification number or a social security number. What info do I need?
bwa
Alumni
Alumni

What are the tax rules on money paid out to a very problematic roommate who has finally agreed to vacate for a $5000 payout? What taxes do we owe?

Use Form W-9 to get his SSN.  A copy is here: <a rel="nofollow" target="_blank" href="https://www.irs.gov/pub/irs-pdf/fw9.pdf">https://www.irs.gov/pub/irs-pdf/fw9.pdf</a>  .  It's much easier to get the W-9 completed BEFORE you give him the check instead of after..
Opus 17
Level 15

What are the tax rules on money paid out to a very problematic roommate who has finally agreed to vacate for a $5000 payout? What taxes do we owe?

If you have not paid the incentive yet, give the tenant a form W-9, which is a request for them to provide you with their tax number) and withhold the payment until they give you the number.

<a rel="nofollow" target="_blank" href="https://www.irs.gov/uac/about-form-w9">https://www.irs.gov/uac/about-form-w9</a>

If you already paid, or if they refuse to give the form and you really want them out, and you can't get the number, you can try submitting the 1099-MISC with a blank tax number.  Maybe try writing "refused".  You might have to mail in an old-school multi-part 1099-MISC on paper rather than submitting it electronically.  (You can get the old style forms from the IRS for free.)  You might need to give the IRS a written statement explaining that the tenant t refused and give as much info about them as you can (name, old and new address, birth data if you know it.  etc.)

(Depending on how you run your rental operation, you really should have the SSN of every tenant. #1 so you can run credit checks before you rent to them and #2 in case you need to issue a 1099-INT for interest earned on the escrow account that holds their security deposit.)
*Answers are correct to the best of my ability at the time of posting but do not constitute legal or tax advice.*
SanFranciscoRain
New Member

What are the tax rules on money paid out to a very problematic roommate who has finally agreed to vacate for a $5000 payout? What taxes do we owe?

It's a former friend that has started behaving terribly and roommate- I'm not a landlord. If I had the forethought to have a better written out subtenant agreement, I wouldn't have to pay this person to leave at all!
SanFranciscoRain
New Member

What are the tax rules on money paid out to a very problematic roommate who has finally agreed to vacate for a $5000 payout? What taxes do we owe?

Thank you all very much for your help!
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