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Tax Help: Security Deposits

March 30, 2000

This is one in a series of tax questions from readers answered by local members of the California Society of Certified Public Accountants, to help with your 1999 and 2000 tax issues.

Q: My tenants pay $1,900 each month in rent. A property management company receives the check, deducts its 10% fee and sends me the balance. This year I had a new tenant, so I received a $1,900 security deposit. But this security deposit appears as "rental income" on my 1099-MISC. Is that an incorrect treatment of the security deposit? I am going to be taxed on the security deposit, when it is not income. It must be returned if the home is in good condition after the conclusion of the lease.

A: The $1,900 security deposit is properly reported on your 1099 as income. When you refund the security deposit to the tenant, you may deduct that payment. Under the "claim-of-right" doctrine, payments must be included in gross income if the taxpayer receives them without restriction under a claim of right. The claim-of-right doctrine means you have unrestricted free and clear use of the funds. This is true even though you may have to repay all or a portion of the security deposit in the future.

--Laura Vahl, CPA, Beverly Hills

To find a certified public accountant, visit http://www.calcpa.org. Questions and answers will also be posted on The Times' Web site at http://www.latimes.com/taxes.

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