Question

Jane, a landlord, enters into a one-year lease agreement with Theodore on 12/27/19. The agreement calls for a monthly rent of $1,000 with payment of 1stand last months’ rents upon signing. Theodore is also required to pay a $200 cleaning deposit that is to be returned at the end of the lease if the property is in good condition. What do you think are Jane’s tax implications for the $2,200 and why?

Answer 1

Solution

Tax year for the year 2019 is from 1st January 2019 to 31st December 2019.

The IRS (Internal Revenue Service) Publication 527 deals with "Residential Rental Property"

Rental Income:-

As per Federal Income tax rule, the advance payment of rent received by the taxpayer (landlord) is treated as "Rental Income" for the year in which the tax payer receives the money.

Therefore, the amount $ 2000 received by Jane as rental advance (1st and last month) will be treated as "Rental Income" for the tax year 2019 which is taxable in that year.

Security deposits:-

As per Federal Income tax rule, any advance payment received by the taxpayer (landlord) in the name of deposit which has to refunded at the end of lease contract is not taxable as it is not treated as income.

Therefore, the amount $ 200 received by Jane as security deposit will not be treated as "Rental income" for the tax year 2019 which is not taxable in any year.