Landlords can claim security deposits returned to tenants as an expense on their IRS tax returns in the case of urban property rental contracts. The amount can be included, in part or in full, in Annex F of the IRS tax return for the year in which the refund was made. This clarification has been provided by the Tax Authority (AT) in binding information published on the Finance portal.
In the opinion of the tax authorities, the deposit constitutes property income under category F of the IRS Code and, as such, a rent receipt must be issued for the corresponding amount to be declared in Annex F.
“In the event of a refund of the security deposit to the tenant, in whole or in part, a document proving the amount refunded must be issued, which can be entered as an expense incurred and paid by the landlord in Annex F of the Model 3 tax return for the year in which the refund occurs,” the note reads.
As for the deduction of losses, the AT recalls that the negative result calculated in a given year (in category F) can only be carried forward for the six years following the year to which it relates, with the carryforward of net income becoming ineffective when the buildings to which the expenses relate do not generate income in category F for at least 36 months of the five years following the expenses.
“With regard to losses, and provided that the requirements established for this purpose are met, the right to carry forward losses requires the taxpayer to opt for the inclusion, in this case, of property income obtained,” the tax authorities specify.
If the security deposit is returned in a year in which the landlord reports a loss in category F - which taxes income from rural, urban, and mixed property rentals, as well as sublease income - and there is no new lease thereafter, the Tax Authority clarifies that the loss “cannot” be reported for tax purposes.
Source: idealistanews