For landlords, it can sometimes be confusing to determine how to classify tenant payments for tax purposes. Are security deposits taxable income? What year’s taxes do first and last months’ rent payments fall under? These types of deposits and advance rent payments can seem confusing at first glance, but the rules are relatively straightforward.
Here’s a quick overview to help you correctly handle taxes and your rental income:
- First and last months’ rent: This type of advance rent payment is income in the year it is received. So regardless of whether the tenant stays for three months within a single calendar year or rents from you for a decade, the first and last months’ rent payment you initially collect is taxable income the year you receive it.
- Security deposit: A security deposit is typically not considered income. That’s because it’s a deposit, not a payment: you plan to return the security deposit to the tenant at the end of the lease, provided the requirements of the lease are met. For that reason, security deposits are not taxable income in the year they are received. However, if you retain part (or all) of the security deposit at the end of the lease (because the tenant did not meet the lease terms), that amount is taxable income in that year.
Still not clear on the best way to handle income and taxes related to your rental property? Taxation Solutions, Inc. can help. Serving Cincinnati-area taxpayers, our enrolled agents and other tax assistance specialists know the tax code inside and out. We’re happy to answer any questions you may have and help you straighten out any tax problems that may have developed in relation to your rental property or other tax issues. Call now to learn more!