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Non-Refundable Security Deposit

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Nathan Emmert

Multi-family Investor from South Jordan, Utah

Apr 24 '12, 02:14 PM


The rental I purchased last week had fairly significant security deposits in place, a portion of which was labeled as "non-refundable".

Am I correct to assume that's essentially income?

If so, from a tax perspective, when is that income realized... when the deposit is made (or transferred) or when the security deposit account is closed out when the lease expires/tenant leaves?

Just curious how to keep my books... thanks!



Kyle Meyers

Residential Landlord from Indianapolis, Indiana

Apr 25 '12, 03:48 AM


I think the record keeping will depend on how you are actually handling this money. If you collect it, put it in your operating account and proceed with business as usual, then I would consider it income immediately. If you hold it in a separate account in the way a security deposit is held and remove it from the account after move out to pay for standard cleaning, I would consider it income then. In thinking about the term deposit, that implies it is refundable usually, so I am thinking this is like a security deposit, but this non-refundable portion is an amount equal to a standard cleaning charge of some sort and would then be charged at move out from the deposit. Do you have any more details? Where is it labeled non-refundable? What does the lease say?



Jeff S. Donor

Real Estate Investor from Portland, Oregon

Apr 25 '12, 07:27 AM


IMO If they are not refundable then they are fees and income which is offset by whatever expense you incur. A fee implies an upcoming expense. Around here they got kind of weird about some fees and now they have to be imbedded into your rental income. Check a landlord hotline and ask about allowable fees.



Jeff S. Donor

Real Estate Investor from Portland, Oregon

Apr 25 '12, 07:31 AM


Just thinking that generally you only receive credit on a purchase for refundable deposits. At least that was how I wrote my earnest monies as an agent selling income properties.

Are you sure you received credit for nonrefundable deposits?



Andrew Jones

SFR Investor from Los Angeles, California

Apr 25 '12, 11:32 AM


I know you can not label security deposits in California as "Non-Refundable", but I am not sure how it is in Utah.

I also know if I collect first and last months rent I must count the last month rent collected during the tax year it was collected. I would imagine this non-refundable security should be treated the same.



Nathan Emmert

Multi-family Investor from South Jordan, Utah

Apr 25 '12, 12:40 PM


Originally posted by Andrew Jones:
I know you can not label security deposits in California as "Non-Refundable", but I am not sure how it is in Utah.

I also know if I collect first and last months rent I must count the last month rent collected during the tax year it was collected. I would imagine this non-refundable security should be treated the same.

Essentially in Utah, we can do whatever a renter is willing to agree to. They are very pro-business here believing the market will eliminate anyone that gets "silly".

Thanks for the input guys. The lease essentially reads like my standard lease... any returnable portion of the security deposit will be return upon completion of this lease minus repairs, blah blah blah. The non-refundable portion is defined in dollar amount, but no commitment to use that towards any standard type between tenant repairs or other possible things that could be deducted from the deposit.

As to the transferring it... I'm positive I got it, wasn't really expecting it. Bought a house with $0, got my $1,000 ED back, $2,050 in security deposits, and $600 or so in rent... got the house and a check for $3,650 :)

In Utah, it seems many use a non-refundable portion of a deposit to pay for placement of tenants. The first time I saw this I was flat out told that by the seller and it seems to make sense here too even though they gave me the money. Whatever works for people I guess!

I'll kick it over to my active accounts out of my "escrow" account for deposits and call it income. It'll help pay for one of my inspections on these other 4 :)



Keith Barton

Real Estate Attorney from Cleveland, Ohio

May 01 '12, 10:40 PM


Nathan - if you paid $0 what was the consideration to acquire the property?

Whatever consideration you paid was the purchase price of the real property, personal property (if any), and any accounts payable/receivable - unless those were explicitly excluded from the purchase.

Therefore, if the purchase price came with the security deposits, and the security deposits (or any portion thereof) do not need to be refunded, they may not be income to you.

It may be possible that those funds will adjust your cost basis. It may be possible that those funds are compensation for fees/services rendered. It may be possible that the money is classified some other way.

Just because the money is new to you doesn't necessarily make it taxable income.

btw - when income is realized depends on your accounting method. If you use cash accounting, income is reported as of when it is actually received by you and expenses are reported as of when they are actually paid by you. If you use accrual accounting, income is reported when it is obligated to be paid to you (whether or not it is actually paid - if it is not paid, it gets deducted as writing off bad debt), and expenses are reported whenever you are obligated to pay them (again, whether or not you actually paid it - however, if you never pay it, they can't be used as a business expense to offset income.)



Account Closed

Landlord from Seattle, Washington

May 01 '12, 11:11 PM


Originally posted by Keith Barton:

... Whatever consideration you paid was the purchase price of the real property, personal property (if any), and any accounts payable/receivable - unless those were explicitly excluded from the purchase.

Therefore, if the purchase price came with the security deposits, and the security deposits (or any portion thereof) do not need to be refunded, they may not be income to you. ....

btw - when income is realized depends on your accounting method. If you use cash accounting, income is reported as of when it is actually received by you and expenses are reported as of when they are actually paid by you. If you use accrual accounting, income is reported when it is obligated to be paid to you (whether or not it is actually paid - if it is not paid, it gets deducted as writing off bad debt), and expenses are reported whenever you are obligated to pay them (again, whether or not you actually paid it - however, if you never pay it, they can't be used as a business expense to offset income.)

I agree that in this situation it is not income as you said.

After the purchase though the nature of any security deposits does matter even to a cash basis taxpayer. Nonrefundable deposits are always treated as income when received. Refundable deposits might not be considered income when received. There are facts and circumstances to consider. For instance if a landlord always charges say $200 for cleaning and the remainder might be returned, then $200 is income and the remainder can be considered a deposit.

There are also technicalities to be considered in calling deposits security deposits as opposed to damage deposits as well. Security deposits at least in my state can be applied to many types of expenses. Damage deposits can not and it is more likely that a damage deposit will need to be returned to a tenant.



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