Failing to report security deposits correctly
Security deposits are an essential tool for landlords to protect their property from any damages caused by tenants. These deposits are not considered rental income when received, but landlords must handle them carefully to avoid any tax-related issues. When a security deposit is received, it must be appropriately documented and accounted for in the landlord’s financial records. If a landlord keeps a security deposit, it must be reported as income on their tax return for the year it was kept. It’s worth noting that landlords may not be required to report security deposits as income if they plan to use them for their intended purpose, such as covering damages caused by a tenant. However, if a landlord decides to keep the security deposit for another reason, such as to cover unpaid rent or other expenses, the deposit must be reported as income. On the other hand, if a security deposit is returned to the tenant, it is not considered rental income and should not be reported to the IRS. In this case, the security deposit is simply a refund of the tenant’s money and is not taxable income for the landlord.
Incorrectly reporting repairs vs. improvements
Landlords must distinguish between repairs and improvements when reporting rental income to the IRS. Repairs, such as fixing a leaky faucet or patching a hole in the wall, are deductible in the year they are made. Improvements, such as adding a new roof or renovating a bathroom, must be depreciated over time.
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