Rental property questions

[Z1]

I own a rental property that is managed through a property management agency. I have two questions:
1. The agency got security deposit from the tenant and it sits in their bank account. I don't have access to that money. Do I need to report it on my taxes?
2. I just got rent for December 2016. Since I received money in January 2017 do I have to include that check in my rental income for 2016?
Thank you for your time!

[TaxGuyBill · Accepted solution]

1)  If the contract says it is a non-refundable security deposit will be automatically applied to the last months rent, yes, you need to claim it.  If not, no, you don't claim it until it becomes non-refundable (it is actually applied against damages).

2)  Did the management company receive it in 2016?  If so, yes, it goes on your 2016 tax return (it is constructively received because they are your "agent").  If not, it goes on the 2017 tax return.

[Z1]

1) I've never seen the contract between the tenant and the agency.
2) The management company received check in 2016.
Thank you for your help!

[DexterS]

1. No don't report it - Security deposits that are held to insure good behavior by the tenant are not income unless forfeited.

2. Also no.  You are a "cash basis taxpayer".  You only report income in the year you receive it and expenses in the year you disburse the funds.

[Z1]

Thank you for your help!
I got two opposite answers, so I don't think I'm any closer to knowing what to do 🙂

[TaxGuyBill]

Here are some IRS statement and links:

"If you authorize someone to be your agent and receive income for you, you are considered to have received it when your agent receives."
<a rel="nofollow" target="_blank" href="https://www.irs.gov/publications/p538/ar02.html#en_US_201212_publink1000270642">https://www.irs.gov/...>

"Do not include a security deposit in your income when you receive it if you plan to return it to your tenant at the end of the lease ...  If an amount called a security deposit is to be used as a final payment of rent, it is advance rent. Include it in your income when you receive it."
<a rel="nofollow" target="_blank" href="https://www.irs.gov/publications/p527/ch01.html#en_US_2016_publink1000218973">https://www.irs.gov/pu...>

[DexterS]

Since your "agent" reported received the December rent in 2016 you have to include that in income.  The security deposit is not included in income unless at some point in the future it's determined that you are not going to return it.

If it was received with the understanding that it was the final month's rent then it does have to be included in income.