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Category Archives: Accounting

Tax Treatment of Damage or Security Deposits

Accounting is not that difficult, if you do things right!

The IRS is very (well, kind of) clear about the treatment of damage or security deposits.  The agency does not recommend the owner treat receipt of deposits as income, whether you use cash or accrual as your method of accounting.  (See Topic 414 – Rental Income & Expenses, paragraph Rental Income).

Iowa Law requires rental deposits be held in a separate account, which may be a trust account.  It’s not only a good practice it has become the law.  And, if you’re a third-party manager, it must be a trust account as is subject to audit by IREC.   But that is not our question.  The question came up, “How should the receipt of deposits be treated in the chart of accounts?”