Earned interest in Savings Account Last Month Rent Deposit

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Hello,

I earned interest on a savings deposit of a tenant's Last Month Rent deposit.  The interest is really my tenant's money and I am simply holding the funds until the last month of the contract comes about.  At that time, I will pay the tenant his earned interest and keep the principal as rent.

How do I deal with this issue?  is there any way to avoid reporting the 1099-INT I received as my income? If not, where or how can I report that this is the tenant's money?

[Mike9241]

" I will pay the tenant his earned interest and keep the principal as rent." you have a tax issue.

if a security deposit is intended to be used as a final rent payment, the amount of the deposit is included as rental income by a landlord when it is received, even if a lease does not end until a following year. report the interest on 1099-INT and then use the nominee adjustment line to zero it out so you don't pay taxes on it. however, this is only if state law requires you to pay or return interest earned on the deposit.  if it's not then it's your income. you get a deduction in the year you return it to the tenant which may not happen if damage is dome to the property and the law allows yo to keep the interest as part of the damages.

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This is not a security deposit.  MA law requires a security deposit be kept in a local bank under a special account which does not generate a 1099-INT.  However, the same law does not pose any requirement for a last month rent deposit as far as where it’s held.  Interest earned is always the tenant’s.  If landlord keeps it below the mattress then they have to pay tenant 5%APR

[Carl]

If the 1099-INT is made out to you, just report the interest and be done with it. I seriously doubt it's going to make any difference on your tax liability at all. Not even a penny difference.

MA law requires a security deposit be kept in a local bank under a special account which does not generate a 1099-INT.

Florida law is similar. For my 3 rentals, I've got their deposit in what is referred to as an escrow account. One of the accounts does pay interest. However, no 1099-INT is issued until such time the funds from escrow are released. Who the 1099 is made out to, depends on who it's released to.

When a tenant vacates, I have to do a "dissolution of deposit" and send to the tenant. I have 15 days after the tenant has vacated, to send the letter. If the tenant is getting all of their deposit back, I usually include a check with that dissolution of deposit. That check will include accumulated interest to date. Once the check clears, I provide the bank with a copy of the deposit letter and they release the funds to me. The 1099-INT is sent to the former tenant at their new address.

If I am making claim to the deposit or any part of it, the tenant has 30 days from the date I sent the dissolution letter to contest my claim. If they do not contest it within that time frame, I again provide the paperwork to the bank and they release the funds to me. If returning a part of the deposit, the part I return must include the total interest. So the tenant still gets the 1099-INT.

If my claim exceeds the deposit, thus including the interest, then I get the 1099-INT.

Typically (at least in FL) when an escrow account of this type is set up, the landlord is the custodian of the account, while the tenant is the beneficiary until such time the landlord makes legal claim to the funds. The bank will not release those funds to either party until such time documentation is provided proving who is entitled to it.

I don't know the details of MA law on this and I'm no legal authority by any stretch. But I would expect that if you did not set up the account as escrow for the tenant, that makes you liable for taxes on the interest, regardless of who that interest belongs to. But again, I'm seriously doubt the interest on that one account for a single tax year will have any impact on your tax liability.