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Is rental security deposit income?

originally posted: 11/22/2006 reposted: 2/18/2011 This post has not been recently reviewed or revised by the author and may be out of date. If you notice an error or are in doubt, please send a new question by email or ask for an update. Email asktony@tonynovak.com.

Q: I will receive a $1000 security deposit when I rent our second home for the first time next month. Does this have to re reported as income?

A: Rental security deposits can either be income or not, depending on how you arrange the lease and how you handle the money. If the lease allows the security deposit to be used as last month's rent, then it is taxable as income when received. If the lease states that the security deposit cannot be used as the last month's rent, and especially if you deposit the security deposit in a custodial account set up for this purpose (depending on the custom and procedures of local law), then it will not be taxable.

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