Question

Ralph owns a building that he is trying to lease. Ralph is a calendar-year, cash-method taxpayer and is trying to evaluate the tax consequences of three different lease arrangements. Under lease 1, the building rents for $680 per month, payable on the first of the next month, and the tenant must make a $680 security deposit that is refunded at the end of the lease. Under lease 2, the building rents for $7,480 per year, payable at the time the lease is signed, but no security deposit is required. Under lease 3, the building rents for $680 per month, payable at the beginning of each month, and the tenant must pay a security deposit of $1,360 that is to be applied toward the rent for the last two months of the lease. (Leave no answers blank. Enter zero if applicable.)

a. What amounts are included in Ralph’s gross income this year if a tenant signs lease 1 on December 1 and makes timely payments under that lease?
Amount included in Gross Income:

b. What amounts are included in Ralph’s gross income this year if the tenant signs lease 2 on December 31 and makes timely payments under that lease?
Amount included in Gross Income:

c. What amounts are included in Ralph’s gross income this year if the tenant signs lease 3 on November 30 and makes timely payments under that lease?
Amount included in Gross Income:

Answer 1

a	Amount included in Gross income this year, if tenant signs lease 1 on December 1
	As Ralph is a calendar year, cash method taxpayer, he will include only the cash receipt of rent
	Rent for the month will be payable on first on next month, thus rent for december he will
	receive in January and calendar year ends on 31st December thus he will not include any amount
	this year.
	Security deposit is a liability, and will be refunded at the end of the lease, thus it is not a income.
	Amount included in gross income	$0
b	Amount included in gross income, if tenant signs lease 2 on December 31 is $7480, he will pay
	the years rent in advance when he sign the lease
	Amount included in gross income	$7,480
c	Amount included in gross income, if tenant signs lease 3 on November 30, will be the amount of
	rental income of 2 months (nov and dec) that is paid in the beginning of each month and security
	deposit that is to be applied toward last two months of the lease.
	Amount included in gross income
	Rental income ($680 x 2 months)	$1,360
	Security deposit (Advance rent for last two months)	$1,360
	Total	$2,720