Tax Implications of the Rent Relief Act of 2018

No comprehensive federal “Rent Relief Act of 2018” was enacted. A bill with this title, S.3250, was introduced in the Senate in July 2018 but did not pass into law. The proposed legislation aimed to create a refundable tax credit for renters spending over 30% of their income on housing. Public discussion about this bill may be confused with established, locally administered rental assistance programs active in 2018.

This article focuses on the actual landscape of rental assistance available during that period, detailing the types of programs that provided aid, the tax implications for tenants, and the reporting responsibilities for landlords.

Rental Assistance Programs in 2018

In 2018, rental assistance was delivered through programs funded by the federal government and administered at the local level. The most prominent of these is the Housing Choice Voucher Program, commonly known as Section 8. This program, funded by the U.S. Department of Housing and Urban Development (HUD), provides rental subsidies to eligible low-income families, the elderly, and persons with disabilities to afford housing in the private market.

The mechanism involves a local Public Housing Agency (PHA) making a direct payment to the landlord on behalf of the tenant. A tenant qualifies based on family size and income, which must fall below low-income limits set by HUD. The voucher covers the difference between the rent and what the tenant can afford, calculated as 30% of their adjusted monthly income.

Beyond Section 8, other sources of rental aid in 2018 included grants from local governments and assistance from non-profit or charitable organizations.

Tax Implications for Tenants Receiving Aid

For tenants who receive assistance from government rental programs, the tax implications are favorable. Payments from government funds for social benefit programs that provide for basic needs like housing are not considered taxable income. This is based on the IRS principle known as the “general welfare exclusion.” This doctrine holds that payments from a government fund, made to promote the general welfare based on need, are not included in the recipient’s gross income.

This means the subsidy portion of the rent, paid directly by a housing agency to the landlord, does not need to be reported by the tenant on their annual tax return. For example, if a tenant lives in an apartment with a total rent of $1,200 per month and the local PHA pays $800 of that amount directly to the landlord, that $800 is not considered income for the tenant. The tenant is only responsible for their own $400 share and does not incur any tax liability from the assistance they receive.

Tax Considerations for Landlords

The tax situation for a landlord receiving rental assistance payments is different from that of the tenant. For tax purposes, all payments received for the use of a rental property are considered taxable income, regardless of their source. This includes the portion of the rent paid directly by the tenant and the subsidy portion paid by a government agency on the tenant’s behalf.

Landlords must report the total amount as gross rental income on Schedule E (Form 1040), Supplemental Income and Loss. For example, if the monthly rent is $1,200, with the tenant paying $400 and a PHA paying $800, the landlord must report the full $1,200 as rental income.

Against this gross rental income, landlords are entitled to deduct all ordinary and necessary expenses incurred in managing the property. As detailed in IRS Publication 527, these deductible expenses include:

• Mortgage interest
• Property taxes
• Insurance
• Costs for repairs and maintenance
• Advertising and property management fees
• Legal services
• Depreciation, which is an allowance for the wear and tear on the property