Claiming Rent money as ( Income ) ... how soon ?

Question

Good Afternoon,I have a situation that I'm sure is not all to common , which is a bot why I'm confused as to what to do / my options areA quick rundown of the scenario at hand .....The property I have is a " second unit " that is attached to the main house by the Roof line only.This unit is currently being rented for $500 a month So once I close and take ownership of the property, I will have a Renter already in place that will be paying me $500 a month.My note on the Property is looking to come in right around $525My question is ..... How soon after I close and take ownership of the property, will I be able to claim this $500 rent money as Income , so that I can show it on my taxes as " Earned Income " and thus use it to pay my own personal note on the house of $525 per month ?My main reason for wanting to know is , that this $500 in rent $ , will basically pay the house note for me ( of $525 ) , and I will need to show on my taxes that this is the case , as I don't want to effect my DTI negatively by having a now new $525 monthly bill, while my Income from my work will stay the same in 2016 .If I can show that I am receiving this $500 in rent,, it will basically be a wash, and won't effect my DTI , and will allow me to qualify (Income wise ) in the purchase of an Investment property come the end of 2016All comments and input is much appreciated - Thanks

Dawn Anastasi · Answer

Where are you getting the source for your statement?I am referencing the Wisconsin Department of Trade and Consumer Protection Website which states "State law does not require payment of interest on security deposits."Landlord-tenant relations in Wisconsin are regulated by Chapter 704, Wisconsin Statutes, and by Chapter ATCP 134, Wis. Adm. Code. If you can find anything in either of those documents stating that security deposits are supposed to be in a separate, interest-bearing account, please let me know.

Kristen Williams · Answer

Just as soon as this house is yours, immediately treat it as rental income, reporting it and all the expenses, on your Schedule E. (see Pub 527, https://www.irs.gov/uac/About-Publication-527) The nice part about doing so, is once the net is figured, it will be THAT income that flows over to your 1040. You can also depreciate and have all other kinds of IRS-approved savings to assist you from a tax liability standpoint, but you can retain the value and promise of future income as well.

Dawn Anastasi · Answer

This doesn't apply in Milwaukee where I'm at.

Dawn Anastasi · Answer

When I receive a security deposit, I put it in the bank. Therefore, it shows under 2 places:Debit to Checking Account (Asset)Credit to Deposits Held (Liability)

Michael Henry · Answer

Wow; I stand corrected! This entire time I believe that was the case. I must of read differently somewhere else. Thanks @Dawn Anastasi

Michael Henry · Answer

Unfortunately, security deposit supposed to deposited in an interest bearing account in Milwaukee, WI; it is a State issue not a local one. It is not enforced by the tenant because most tenant don't know. And the fact that interest rates are low it is kind of a moot point.

Jeff B. · Answer

@Dawn AnastasiYou've co-mingled deposits with rents (debit to checking) and in some jurisdictions that's a no-no. In others, deposits must be held in an interest bearing account and the deposit+interest refunded as appropriate.The Equity; Deposits Held and Liabilities; Deposits Received are as generic as possible and do not imply specifically WHERE deposits are located.I move the Equity; Deposits Held funds into another account altogether in a separate Credit Union to avoid all these issues.

Jeff B. · Answer

Security Deposits show up twice in an accounting system:Under Equity; Deposits HeldLiabilities: Deposits ReceivedNeither is a PnL item, but only are shown on a balance sheet.

Jeff B. · Answer

Rent becomes income when received - - it's that easy.The fun comes in when we consider IRS+State taxation vs how a Bank may see it.Follow this:1) each month you issued invoices and receive payments2) you also record Billings and Payment.Now run the Pnl To Date or PnL This Month and you will see:Gross incomeTotal ExpensesNet ProfitsThe rents collected are in your Gross, the expenses all show up on the Sch EThe PnL shows NOTHING for Reserves/CapExp nor Vacancies because they are neither Income Nor Expenses and thus none show up on the Sch E.The items: Reserves, CapExp, Vacancies are used ONLY for prudent cost accounting and management to 'help' you manage a self-sustaining property.

Dawn Anastasi · Answer

I count rental income when I receive it. So if I receive pro-rated rents at closing, I'm receiving rents and therefore receiving income. Security deposits are NOT income so don't count those as income.