Rental Deposit Adjustments

[jjg512]

Our vacation/rental property was sold on June 30, 2020 before any 2020 rentals occurred. We collected deposits for 2020 rentals in 2019 and 2020, all of which were remitted to the buyer outside of closing. The deposits received in 2019 were reported and taxed as ordinary income in our 2019 return.

Deposits and final rental payments were also collected in 2020. Some of this “income” was reported to us on a 1099-MISC and will be reported on our 2020 return.

We have two related questions:

1. Where and how can we recover the 2019 tax that we paid on income which is now the responsibility of the buyer? and,
2. How and where should we enter the deduction for the reported 2020 rental income?

[MaryK4]

You can enter the 2019 deposits as deductions- use the Misc. Income category and use Deposits paid to new owner as description.  This will negate the income you reported in 2019 so no other tax adjustment should be needed.  You can enter the 2020 rental income on the Schedule E.

[Carl]

Where and how can we recover the 2019 tax that we paid on income which is now the responsibility of the buyer?

It's a miscellaneous expense in the rental expenses section of your 2020 SCH E.

How and where should we enter the deduction for the reported 2020 rental income?

On the SCH E. It gets included in the total amount you report in the rental income section. The fact the property was rented zero days in 2020 is perfectly fine.

WARNING! What ever you do, *DO* *NOT* select the option for "I did not rent or attempt to rent this property in 2020". If you select that option, you will be forced to delete the SCH E and you will lose all of your depreciation history, and your carry over losses (if any) on the form 4797.