One of the most important issues for owners of income property is deciding whether or not to have tenants directly pay for utilities like water, gas and electricity. There is no hard and fast rule, and the decision depends on a number of factors.
- Duration of the Lease: It is common for landlords to put utilities in the name of the tenant if the tenant plans to live in the property for a year or more. If your tenant is on a month-to-month or short term lease (less than a year), it may be preferable to keep the utilities in your name and charge the renter for use.
- Control: The IRS allows reasonable utility costs during occupancy or vacancy to be deducted from a landlord’s taxes, so it may make sense for you to maintain control of the utilities. You should keep in mind, however, that these deductions won’t benefit you until the next tax cycle, so you should budget accordingly. The definition of “reasonable” may also be somewhat hard to define, so it is wise to contact your accountant ahead of time about what expenses can be deducted and what paperwork is required.
- Liability: Depending on the location of your home, if your tenant is responsible for paying the utilities and they miss a payment or leave without paying, you may be held liable for the bill or the late payment to the utility company. If you City makes it a policy to hold the owner of the property liable for all utility bills, you may want to consider keeping the utilities in your name and making arrangements for recovery from your tenant. To protect yourself from tenants that run up a large bill and then leave, make sure you have a sizeable security deposit.
- Sub-Metering: In multi-unit properties it is possible to employ sub-metering technology so that you can maintain responsibility for the utilities but still allocate utility usage to your tenants and charge them accordingly. Sub-metering technology transfers the costs of the utilities to your tenants, while giving you utility bill control.
- Reconnect Fees: Many utility companies charge fees for the resumption of services at a property, so if you own a building with high turnover you may want to retain control of utility billing.