Can Landlords Forgive Debt?

Debt between two private parties can be forgiven at any time. Landlords can legally forgive the debt of their tenants, provided that they are the sole owner of the property. The motivation for such debt forgiveness may be to increase the probability of full payment of future rent or a barter where services or improvement to the property are exchanged for rent payments.

Debt Forgiveness

Debt between two private parties, whether the parties involved are individuals or corporations, can be forgiven at any time. Just as there is no law prohibiting you from handing cash to someone as gift, there is no legal reason the landlord cannot forgive the debt of tenants. The debt may be due to unpaid rent, damage done to the property or any other reason.

A prerequisite for such forgiveness, however, is that the debt is written of by the landlord and not an agent of the landlord who lacks such authority. If you pay your rent to third party, such as an accountant, who merely acts as an agent, such individuals or companies cannot forgive the debt without express consent of the landlord.

Payment Plans

There can be many reasons a landlord may wish to forgive debt. If the landlord is convinced that the tenant genuinely lacks the ability to pay the outstanding debt in full, he or she may forgive some of the outstanding balance in exchange for a more realistic payment plan. A tenant who feels that eviction is inevitable may stop making payments even though it is within his or her ability to pay some of the outstanding debt. If given assurance that partial payments will eliminate legal proceedings, however, tenants are often much more motivated to cooperate.

Barter

Landlords may also forgive some or all outstanding debt in exchange for services performed by the tenant. A skilled tenant could paint the house or perform repairs or landscaping services at several properties owned by the landlord, for instance. Technically speaking, such an exchange is not really forgiveness, but a barter. However, in many cases an element of forgiveness is involved if the services provided by the tenant are valued less than the amount of debt forgiven. The landlord may believe that the legal costs and effort involved in legal proceedings make such partial forgiveness feasible.

Tax Consequences

Any debt that is forgiven is taxed as income by the Internal Revenue Service. Therefore, the tenant's net gain as a result of forgiven debt may be smaller than anticipated. If, however, a barter is involved, the debt that was written off will not be taxed. To prove that the debt written off by the landlord was in exchange of services performed, obtain a written statement, which you can later present to the IRS. If a partial trade was performed, document how much of the loan amount was forgiven versus bartered.