USA lost income from house rental as bad loan

[AGabhart]

How can the lost income from an apartment be considered a bad loan?
My tenants are employees in the restaurant business, and have been mostly employed for the past few years.
I created an agreement with these tenants to repay these unpaid rents, with late charges and interest. This agreement is an addendum to the current lease.
I am in the process of evicting them.
Can this be called a bad loan?

 

[DrStrangeLove]

IANAL, but I don't think so. Landlord-tenant law is usually heavily influenced by state and local laws. Which state are you in? That may shed some light.

You didn't loan them anything; the agreement to pay memorializes what they already owed you under the lease. And you attached it to the lease as an addendum, which (I'm assuming) they agreed to. As an addendum, the entirety clause applies to the addendum, and so your agreement isn't a loan separate from the lease. It's definitely a loss that you sustained under the lease contract, and it sounds like it fits as a credit loss. But it's not a separate loan.

Is there a state legal reason why you're looking to treat it as a loss on a loan and not as a loss from a lease? Financially, it's six of one, a half-dozen of the other. So unless there's a legal distinction to be made, I'm not clear on why it would matter.

 

[AGabhart]

1. I live in Michigan.

2. Is there a state legal reason why you're looking to treat it as a loss on a loan and not as a loss from a lease?
The reason for asking about it as a loan may simply a lack of understanding.
I use Schedule E to report this data. I am not familiar how I can report an income loss from a lease on Schedule E. I didn't think it would allow a negative number. Is that negative number possible?

 

[DrStrangeLove]

You haven't had a "income loss" for tax purposes if the tenants didn't pay the rent; you simply didn't have income. It's only "income loss" if you earned it but didn't receive it. That requires being on an accrual basis. Your 1040, including the Schedules, is normally on a cash basis. That means rent is income when received, not when earned. Just as you'd have to recognize rent paid in advance in the year it was paid, since they didn't pay the rent, the rent they didn't pay wouldn't go into income. If they pay it the following tax year, you'll recognize it then.

Your state income tax may differ with regard to rental income and nonpayment. I don't know Michigan state income tax law, so YMMV for Lansing's purposes.

 

[AGabhart]

Thanks for confirming my idea was not correct.