Rental Income Rules for Security Deposits

By
Services for Real Estate Pros with Charles G. Perkins, CPA

 

Rental Income rules for security deposits

 

General Rules

 

Each state has slightly different rules regarding deposits collected when a new tenant moves in.  Deposit can be collected for utilities, cleaning, damages, last month rent and some other purposes.  Deposits can be refundable or nonrefundable in some cases.  The rules will vary from state to state. 

A deposit is a liability.  In other words this is money that you may have to return at some future date.  Because of this many states have enacted rules regarding what can and cannot be done with these funds.  In Washington State, these funds must be deposited in a separate bank account and that information disclosed to your tenant.  These funds must be held in trust.

http://www.rentlaw.com/securitydeposit.htm

 

Federal Income tax rules applying to deposits

 

For tax purposes it is important to know the purpose of any deposit.  Money that is being held in trust to pay for any future damages or refundable cleaning  must be returned within a certain number of days unless written notice is provided as to why any amount has been withheld.  This money is not considered income at the time it is received for tax purposes. 

When the tenant moves out any portion of the damage deposit not returned to the tenant is considered rental income.  Of course generally this is offset by rental expenses that were listed on the written notice provided to the tenant at move out.

If a landlord collects a nonrefundable cleaning deposit or advance rent payment this is considered rental income in the year received. 

State income rules generally are similar to the federal rules, but you should consult with your tax preparer.

 

Posted by

Charles G. Perkins, CPA

Servings Small Businesses in the Puget Sound Area

 

Cell: (206) 422-5504

Office: (206) 228-1988

email: charles@charlesperkinscpa.com

website: www.charlesperkinscpa.com

 

Charles G. Perkins, CPAI look forward to meeting your business and tax needs.  I also have many partners in business that can meet your other business needs.  These include contractors, insurance agents, investment advisers, financial planners, mortgage advisers, and many others.

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Re-Blogged 1 time:

Re-Blogged By Re-Blogged At
  1. DEBORAH STONE 11/22/2009 05:13 PM
Topic:
Real Estate General Information
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All Real Estate - Today & Tomorrow
Diary of a Realtor
Investing for Dummies
Real Estate Investors
Investing in Real Estate
Tags:
rental income
security deposits
refundable deposits
nonrefundable deposits
charles perkins cpa
burien cpa

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Show All Comments
Rainmaker
562,448
Steve, Joel & Steve A. Chain
Chain Real Estate Investments & Mortgage, Steve & Joel Chain - Cottonwood, CA

Charles, These are good points. This is not something a landlord would want to learn after the fact. 

Nov 14, 2009 12:32 AM #1
Rainer
110,832
Charles Perkins
Charles G. Perkins, CPA - Burien, WA

Steve,

So true.  A landlord needs to understand the landlord/tenant laws of their state, needs to be familiar with the tax consequences of investing in real estate and needs to know the risks associated with investments.  Professionals can assist in many of these areas, but at least a basic understanding is advisable.

Nov 14, 2009 01:09 AM #2
Anonymous
Anonymous
Anonymous

Very important to review the property with the tenant at move in as well.  It can also be helpful to take pictures and video of the existing condition of the space at the time the tenant moves in.  This helps eliminate some of the problems that can occur when you need to hold back part of the security deposit.

Nov 14, 2009 01:39 AM #3
Anonymous
Anonymous
Anonymous

Very important to review the property with the tenant at move in as well.  It can also be helpful to take pictures and video of the existing condition of the space at the time the tenant moves in.  This helps eliminate some of the problems that can occur when you need to hold back part of the security deposit.

Nov 14, 2009 01:41 AM #4
Rainmaker
954,820
Kathy Clulow
RE/MAX All-Stars Realty Inc. Brokerage - Uxbridge, ON
CNE - ASP - SRES .... Uxbridge Ontario Real Estate

Charles - tax laws are something small mom and pop investors tend to forget or need to learn about when purchasing investment properties.

Nov 14, 2009 01:42 AM #5
Rainer
156,491
Tom Boos
Sine & Monaghan Realtors, Real Living - Grosse Pointe Farms, MI

Thanks for the quick review of rules for every Landlord to be aware with regard to deposits.  Many "new" landlords haven't a clue.

Nov 14, 2009 07:57 AM #6
Rainer
110,832
Charles Perkins
Charles G. Perkins, CPA - Burien, WA

Tom

There is a lot that new landlords should learn.  I agree that most have no idea and think of it a their personal gold mine.  It doesn't take long to realize that cash flows can go both ways.

Nov 14, 2009 10:49 AM #7
Rainer
5,453
Quail Point
Quail Point - Raleigh, NC

Great content. Very informative. By the way did you know that you can purchase turn key rental properties using your IRA OR 401K? Find out how at http://www.irarentals.com/

QP Logo

Nov 17, 2009 10:34 AM #8
Rainmaker
251,689
Robert Machado
HomePointe Property Management, CRMC - Sacramento, CA
CPM MPM - Property Manager and Property Management - Sacramento Area

The operative word is to know the laws of the state you are in.  Check with your property manager or attorney.

Jan 21, 2010 12:29 AM #9
Rainmaker
310,118
Michael Delaware
Troxel Realty Co. LLC - Battle Creek, MI
REALTORĀ®, CRS

Thanks for the review.  A lot of landlords I know don't follow this, and it will come to bite them at some future date. 

Feb 11, 2010 01:31 PM #10
Rainer
110,832
Charles Perkins
Charles G. Perkins, CPA - Burien, WA

Robert,

So true.  Like any business you need to know the laws and accountant for what you are doing properly.  Sometimes this means hiring competent help when you lack the time or skills to do it your self.  Flying blind is a poor way to run a business.

Michael,

As a CPA, I see a lot of this.  I have also helped clients deal with the IRS when they failed to report there income properly as well.

Feb 13, 2010 02:46 PM #11
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