Rental Income Rules for Security Deposits

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Real Estate Services 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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  1. DEBORAH STONE 11/22/2009 05:13 PM
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Rainer
110,832
Charles Perkins
Charles G. Perkins, CPA

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.

November 14, 2009 10:49 AM
Rainer
5,453
Quail Point
Quail Point

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/

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November 17, 2009 10:34 AM
Rainmaker
251,166
Robert Machado
CPM MPM - Property Manager and Property Management - Sacramento Area
HomePointe Property Management, CRMC

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

January 21, 2010 12:29 AM
Rainmaker
309,860
Michael Delaware
REALTOR®, CRS
Troxel Realty Co. LLC

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. 

February 11, 2010 01:31 PM
Rainer
110,832
Charles Perkins
Charles G. Perkins, CPA

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.

February 13, 2010 02:46 PM
Anonymous
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Charles Perkins

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