As year end approaches, rental property owners should review tenant payments carefully. Advance rent and security deposits may be taxed differently. Advance rent is generally taxable in the year received, regardless of the period covered or the landlord’s accounting method. By contrast, a refundable security deposit generally isn’t taxable when received if it’s held to cover property damage or other lease obligations. A refundable deposit generally becomes taxable if it’s later applied to unpaid rent. But a payment intended to cover the final month’s rent is taxable when received, even if it’s called a security deposit. Contact us to help determine the proper tax treatment of tenant payments.
