Can IRS Form 1099-C be an effective tool in discussions with a recalcitrant tenant refusing to pay COVID-era rent debt?

Some well-to-do tenants may be motivated to pay COVID-related rent debt in order to avoid a tax burden.

We don't have an exact number, but suffice it to say that there are tens of millions of dollars in COVID-related rent debt in the Bay Area. While there are some token efforts to furnish additional funds to landlords to recoup lost income, it is a drop in the bucket.

Whoever says landlords will be "made whole" lives in a fantasy land. 

Although we could go to court to recover the unpaid rent accrued during eviction moratoriums, we are not all that optimistic that tenants will, in fact, pay the money to satisfy this debt, especially for those who are living hand to mouth.

In Alameda County, policymakers often stressed that COVID-related rent debt was deferred, not waived. The debt still exists - it's not canceled, but the tenant is given a grace period to pay it back at a later date, it was submitted.

Does anyone believe that landlords will actually recoup this money?


Let's take a look at the tenant's economic status. 

It's been said that you cannot get blood from a stone. If a tenant lives hand to mouth, we are not all that optimistic that rent arrears will be recouped. With the assistance of Bornstein law, owners can obtain a judgment, but recovering the money is a whole different story yet to unfold. 

Contrast this with an affluent tenant or someone who has an upward trajectory in life. They likely want to preserve their credit and otherwise want to reduce the consequences of not paying rent that piled up during the pandemic. 

We are talking about gainfully employed tenants who went to work every day and sometimes came back in a shiny new car, but they refused to pay the rent because they were shielded by an eviction moratorium. 

One of the consequences they can face would be a tax burden incurred when a landlord "forgives" rent debt. With dismal prospects of recovering COVID-related rent debt that is now converted into consumer debt - that is, the tenant still owes the money but cannot be evicted for failure to pay it - the mere mention of a 1099-C can incentivize tenants into a settlement.

So, as a hypothetical, if a tenant owes $50K in COVID-related rent debt, and they have to pay 20% in taxes when a 1099-C is filed, ($10K is owed to the government), the owner can use this as leverage in negotiating a settlement, let's say $5K.

"Mr. Smith, if we are unable to come to an agreement with regard to this rent debt, I will have no choice to file an IRS form 1099-C, and this becomes a taxable event for you. Rather than going down this route, I urge you to enter into a payment arrangement to reduce your tax liability." (Something like that)

Is it possible for forgiven rent debt to be written off? 

In accrual-based accounting, yes. But alas, most rental property owners rely on a cash-based accounting system where financial transactions are recorded only when cash exchanges hands. In this event, the landlord cannot write off the rent debt owed.


When to broach the discussion of a 1099-C?

Dangling the possibility of a 1099-C is really a supplemental tool on top of other carrots and sticks to persuade the tenant to pay back COVID-related rent debt.

In general, most renters with the ability to pay rent dutifully paid and make payment arrangements if there was a genuine hardship and they later got back on their feet.

But our law office is somewhat biased because when a situation crosses our desk, there is dysfunction. The untold number of responsible residents paying their rent on time goes unreported - clients do not contact Bornstein Law when a resident makes a timely payment. By the time a matter crosses our desks, a tenant owes rent and oftentimes, an astronomical amount.

We trust that most high-income earners will be reasonable and responsible in fulfilling their obligation to pay past rent, even if it is a game of dodgeball. When there are well-to-do tenants, however, who believe they have gotten a free ride and that they can ignore the rent debt with impunity, a 1099-C may persuade them to pay, at minimum, a portion of the debt owed.  A lawsuit, of course, is another obvious option.

Some people get it with a feather. Others with a freight train.

Not our wheelhouse

While our specialty is managing landlord-tenant relationships, WE STRONGLY ADVISE that prior to discussing the 1099-C option with your tenant, you seek appropriate tax advice from a professional – either your CPA, Accountant, or attorney specializing in tax law.  We are happy to work with practitioners who are experts in their subject matter.