Dear Dr. DIG

Q. Last October we moved into our new home. We are thinking of renting our former house, perhaps on a lease-option. If we rent the house to tenants, how much tax would we owe?

A. Converting your personal residence to rental status is not a taxable event. Of course, you will report the rental income on Schedule E of your income tax returns. This is the same place you can deduct applicable expenses such as mortgage interest, fire insurance, property taxes, repairs and depreciation.

The best deduction is depreciation because it is a noncash deduction. You can depreciate the lower of your adjusted cost basis (usually purchase price plus improvements) of the home's market value on the date of conversion to

rental. The tax result probably will be a tax loss which, up to $25,000, is deductible against your ordinary taxable income if you earn less than $100,000 per year.

Q. After my neighbor died in 1993, her daughter and sole heir promised I would have the first opportunity to buy the house, which she inherited. She agreed to carry back the mortgage with a 10 percent down payment. We discussed the price and all the details. But last week she listed the house for sale with a Realtor at an asking price almost $25,000 higher than we agreed on, and she wants all cash. How can I enforce our verbal agreement, which was witnessed by another neighbor?

A. Sorry, verbal real estate sales agreements are not enforceable. The Statute of Frauds requires all contracts affecting real estate, such as for sales, leases and financing to be written if they are to be legally enforced.

There is a very good reason reality contracts must be in writing. It prevents misunderstandings. Although you had a witness to your discussion with the heir of the nearby house, you and the heir might recall the verbal agreement differently.

Only if you had partially performed the agreement, such as giving the heir a down payment or making improvements to the house, would the transaction be taken out of the Statute of Frauds writing requirement. Please consult your attorney for further details.

Q. Recently, on several incidents, some of our colleagues have not been able to collect rent in court for vacant units when tenants moved before the expiration of a year's lease. It would seem to me that for a written lease for one year, the ability to collect rent for the balance of a lease is enforceable in a court of law.

A. Your inquiry did not state the reason the courts have given for refusing to give judgments sought by landlords in your area. I will assume the reason to be mitigation, since that is encountered most often.

Leases are contracts and are governed by contract law which is pretty much the same in most states. Contract law requires that, when the contract is breached, the injured party must mitigate the resulting damages.

To illustrate, suppose a grocer contracts with a Florida orange grower for his winter supply of fruit.

Along comes a freeze and the price of oranges goes up sharply. The grower refuses to honor his contract with the grocer.

The injured grocer cannot let the season go by with no oranges to sell and then sue the grower for all the lost sales.

He must mitigate the damage. He must go out and buy oranges for his grocery at the best price he can get.

Then he can sue the original grower for the difference between the profit he'd have enjoyed if the contract had been honored and the actual profit he made selling costlier oranges.

In a lease situation, a breaching resident cannot be sued for the amount due through the balance of the lease when the resident moves out.

The owner must mitigate the potential loss to the greatest extent he reasonably can. When the rental falls vacant in mid- lease, the landlord must clean it up, advertise it, show it and re-rent it for the best price he can get.

Then he may sue the breaching resident for the difference between his actual net earnings for the period and what he would have received if the breach had not occurred.

Obviously, the actual net earnings from the new tenant can be reduced by the costs of the extra clean-up, extra advertising and if a reduced rate was offered to the new resident because it was necessary to offer a bargain in Order to obtain an off-season re-rental.

It is important to understand that there is not absolute right to recover the face value of a contract should the other party default.

The courts will always require that you be able to demonstrate a good faith effort to reduce Your contractual loss as far as it was in your power to reasonably do so.


Reprinted Courtesy of the Diversified Investor Group. Visit or call (215) 712-2525 Source: The Diversified Investor, April 2018 issue.

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