CRE Insurance & Loss of Income

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Businesses nationwide have experienced disrupted activity starting in March due to mandated COVID-19 closures. As various regions experience cycles of reopening and re-closing, a measure of uncertainty hovers over tenant’s businesses. Even recipients of SBA loans through the Paycheck Protection Program and the CARES Act adapted their operations to the new normal and faced varying degrees of challenges as they do so.

In some instances, these events have caused a domino effect of businesses struggling to pay rent, landlords unable to pay back mortgage loans, and local governments recognizing they may not receive needed property tax income. However, many experts predict relatively quick recovery despite these challenges.

The number of retailers making rent is rising, though still below last year’s data. Eighty percent of national retailers paid July rent, compared to fewer than 60 percent in May, according to Chain Store Age and a report by data firm Datex Property Solutions. Major retailers paid 96 percent of their rent in May 2019, Datex reported.

Given the market turbulence, there are some ways landlords can protect themselves from unforeseen circumstances.

Can I purchase rental loss insurance?

Major property insurance carriers typically offer rental loss insurance. Commercial property owners can buy it as part of their commercial real estate insurance. It usually covers one month of rental income, but extended coverage can be added.

Rental loss insurance also might be available as part of business interruption insurance, which covers loss of income due to an unexpected event.

How much can you write off for real estate loss?

Taxpayers who own and rent out property in the US can take advantage of federal tax deductions for rental real estate loss. An individual can deduct $25,000 annually can be deducted as a commercial real estate loss if the person’s annual gross income is $100,000 or less. Those with incomes between $100,000 and $150,000 are eligible for phased out deductions, while owners with higher adjusted gross incomes are ineligible.

How do you show a loss on a rental property?

A taxable loss on rental properties due to a weak economy is usually considered a passive loss. 

Passive activity loss (PAL) rules allow CRE owners to deduct losses if they still collect passive income from other revenue streams, such as income from a second rental property. A passive loss exceeding the passive income will be suspended until the owner has enough passive income or sells the underperforming property.

Owners also can check whether their property qualifies for an exception to the PAL rules, allowing them to deduct rental property losses sooner.

Can I forward rental losses?

Rental losses that cannot be deducted can be carried over into future tax years to deduct against later rental profits. 

For commercial property investors, loss from rental assets is often considered a passive loss. As such, the IRS does not deduct those losses against ordinary income. However, CRE professionals usually can deduct rental losses from their income. 

Visit the IRS website for more information.

How can landlords recover lost rents in a disaster or recession? 

Some mortgage servicers will allow property owners to reduce or defer mortgage payments if income is lost due to COVID-19. Bank of America is among those offering support for consumer and small business clients.

Too, in the wake of COVID-19, government-funded programs launched by the Small Business Administration serve as temporary funding solutions. These include a lending option offering low rates and possible loan forgiveness under the Paycheck Protection Program.

How can you fill commercial spaces in a recession?

To retain tenants, landlords can begin lease renewal negotiations early. Tenants might request lease concessions, which potentially could be a better financial option than paying commission, legal and retrofitting costs associated with filling a vacancy.

Landlords also can consider offering a rent concession in exchange for something that will benefit their portfolio in the long-term, such as signing an extended lease.

Some landlords might negotiate with tenants to receive partial payment of rent to be paid back over a specified period of time. Subletting space or offering short-term leases might be other choices to fill space.

Pandemic-related business shutdowns and adjustments have shaken the nation’s economy and left many businesses facing income losses. Commercial real estate investing faces challenges in these times, but CRE insurance, mortgage lenders, and tax deductions can help investors stay afloat.

About the Author:

Ryan Letzeiser is the Co-Founder and CEO of Obie, a portfolio management platform for commercial and multi-family real estate.  He’s written on CRE for sites like Realty Times, Think Realty, REOptimizer, Propmodo, and Bigger Pockets.

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