Security deposit for damages/costs

Setup & Support
1

I have looked at the applying of security deposits to balance of rent due, but I believe this is a distinct question.

Example:

  • $500 security deposit
  • $150 to pay company to clean out unit (removing furniture, trash, food, clothing, etc).
  • $200 to pay cleaning company to do deep cleaning.
  • If all else was satisfied, return the remaining $150 to tenant.

Would you track the individual expenses of the clean out and cleaning as normal expenses to contractors. But could you “fund” those from the deposit? Or do you just refund the $150 from the deposit and then consider the other as income? Like the other concerns around security deposits becoming income and taxable, it seems this approach would cause the same concern/scenario.

Thanks in advance.

2

If you are using a tenant’s security deposit to cover damages and costs to return the unit to its original state, you will need to record the unreturned portion of their security deposit as income.

To record expenses incurred:
DR Expenses 350.00
CR Cash 350.00

To record use of tenant’s security deposit:
DR Security Deposits 350.00
CR Rental Income 350.00

To record payout of remaining security deposit to tenant:
DR Security Deposits 150.00
CR Cash 150.00

You need to record the “unreturned” security deposit as income, but at the end of the day, there should be no tax impact because you are recording the expenses to offset the income.