Condo to rental - 2 questions

[slara22]

I converted my condo from personal use to a rental in August 2021. It was rented at fair market value between Aug. and Dec. 31, 2021 (139 rental days, 0 personal days).  

Question 1:  What would be the percentage of time the condo was used as a rental business in 2021? Would the percentage of time be 39% because that is what corresponds to 139 days? Or would it be 100% because the 139 days it was rented, it was used as a rental 100% of the time?

Question 2: With the rental agreement, I received a security deposit, to be returned at the end of the rental contract (not to be used as a last month payment). I got a 1099MISC, which included the rental income AND the security deposit as the total income amount received. 

Is it true that, when reporting rental income, I should NOT include the security deposit as I intend to return it? Or do I need to report the total amount stated in the 1099MISC, which is the sum of the security deposit plus the monthly rental?  If I don't need to include the security deposit amount, should I just "override" the 1099MISC and write the actual amount received when entering the info on TurboTax (e.g., not including the security deposit)?

Thanks so much in advance!

[tagteam]

---

@slara22 wrote:

...would it be 100% because the 139 days it was rented, it was used as a rental 100% of the time?

---

It would indeed be 100% because there was no personal use after you converted the property to rental use.

[tagteam]

---

@slara22 wrote:

....do I need to report the total amount stated in the 1099MISC, which is the sum of the security deposit plus the monthly rental?

---

This was done improperly; the security deposit should have been excluded since the intention was to return the deposit to the tenant at the end of the lease.

However, in order to avoid a mismatch, you should report the entire amount on the 1099-MISC and then deduct the amount of the security deposit (probably best if it were deducted as a miscellaneous expense).

[Carl]

Question 2: With the rental agreement, I received a security deposit, to be returned at the end of the rental contract (not to be used as a last month payment). I got a 1099MISC, which included the rental income AND the security deposit as the total income amount received.

Report the 1099-MISC exactly as printed. If you don't, this has the potential to raise flags with the IRS. Then in the expenses section enter a miscellaneous expense for the amount of the security deposit and call it something like "Security Deposit".

While you may not need to, I would recommend you withdraw the exact amount of the security deposit from whatever account you deposited the rental funds into, and deposit the amount in a separate account which doesn't have to be, but should be the account you will write the check on when it's time to return said deposit. This gives you a paper trail should you ever be audited on this matter.

Also be aware that by most state laws (depends on your state) the security deposit is not the landlord's money. It remains the tenant's money until such time the landlord makes a legal claim against it. 

As an example, check out how it works in my state of Florida at https://www.nolo.com/legal-encyclopedia/florida-security-deposits-36204.html  That website is just a brief synopsis really and doesn't cover the legal aspects in very much depth. But I follow that state law to the letter. My failure to do so could result in me having to return the deposit with interest, weather I have a valid claim against it or not.

One book I recommend you purchase is called "Landlord & Tenant Rights & Duties in [State]"  and it's available at Barnes and Noble. There's a group of lawyers that write this book for each state. For my state of Florida the author is Mark Warda (Attorney at Law).  The one for your state may have a different author/lawyer.

The book includes all the legal forms and everything needed for anything, such as dissolution of deposit, notice of late rent, notice to pay rent or damages, notice of eviction, as well as all the legal forms required for filing legal actions at the local courthouse. 

More importantly, it also educates you on the tenant's rights, so you don't get blind sided in small claims court by an educated tenant.

[tagteam]

---

@Carl wrote:

One book I recommend you purchase is called "Landlord & Tenant Rights & Duties in [State]"...

---

I would recommend checking whether any book on this subject is horrifically out of date before purchasing it. Some in this series have not been updated since the 1990's.

[Carl]

@tagteam I buy a new issue about every 2-3 years. The last one I purchased was printed in 2019 and takes into account tax law changes of 2018. (Yes, the book covers the tax portion of rentals too, for federal and state if applicable.)

[slara22]

Thank you so much, @tagteam for your help! This clarified and made it easy to understand and do. 

[slara22]

Thank you so much, @Carl  for the suggestion of having a paper trail on that security deposit check! Will do.