Are you having tenants fill out a W-9 Form?

Question

I just heard about a property management company having their tenants fill out a W-9 Form when they lease them up.  This is for the purpose of reporting to the IRS any security deposit refunds of more than $600.

I'll check with my CPA on Monday to see what she says, but it doesn't seem logical to me to report a payment of over $600 to a tenant if that money was simply a refund of their own money.  It's not as if that money is income that should be taxable?  Am I missing something?  How many folks out there are also having tenants fill out IRS W-9 Forms?

Mike Hurney · Answer

@Enrique Jevons

I used to keep all my Security Deposits  in one account until the housing Court Judge advised me: "That much money in an account would be a Tenant Attorney's dream for any mishandling, with triple damage/punitive awards!!!"

So I've divided them up by building for 1-4 families and by floor on larger buildings.

@Corey Pascuzzi  What bank is that? I've got them at Sovereign and BOA without W9s

Jake Hottenrott · Answer

Enrique,

The reason for the W-9 is two fold.

1- In states with the requirement to hold the deposit in a separate account(A Trust account per the Washington State Bar Pamphlet link below), you will need the W-9 to open the bank account.

2- In states that require interest to be paid on the deposit held, you need a W-9 to ensure the interest is reported on the 1099 to the correct social security number. (Which does not apply to Washington State)

Here's a quick excerpt from the landlord tenant pamphlet provided by the Washington Bar Association

http://www.wsba.org/~/media/Files/News_Events/Publ...

"Deposit Requirement

A landlord may require a deposit to ensure that the tenant takes care of

the unit and complies with the terms of the rental agreement. Deposit

requirements cannot be discriminatory, nor may a deposit be increased

to retaliate against a tenant. A nonrefundable fee cannot be called a

“deposit.” A refundable damage or security deposit must be distinguished

from nonrefundable cleaning fees.

If a deposit or nonrefundable fee is charged, the lease or rental

agreement must be in writing, and must include the terms and conditions

under which any deposit will be returned. A deposit cannot be withheld for

normal wear and tear. If a tenant pays a deposit, the landlord must provide

a document describing the condition of the rental unit. The landlord is

required to keep deposits in a trust account, and must also provide the

tenant with a receipt and the name and address of the depository. Any

interest earned on a deposit belongs to the landlord.

The landlord has 14 days after a tenant moves out to return a deposit,

or give a written explanation of why it (or any part of it) was not refunded.

If a landlord does not comply, the full amount of the deposit must be

refunded to the tenant, regardless of any claims by the landlord that the

tenant is not entitled to a refund."

Hope that helps! If your CPA provides any additional information, definitely share it!

Jake

Marie S. · Answer

Some states require that the deposit is placed in an interest bearing account. If you have a long-term tenant, the account accrues a quite a bit of change. Considering the fact that the tenants deposit can't be co-mingled with other funds, most people open a single deposit account per tenant. That account is a trust type account. You're holding the money, but it belongs to the tenant. Most banks will not allow you to open this type of account without the W-9.

Glenn Willeford · Answer

Putting the deposits in a separate account seems like a good idea. Does anybody else do this?

Corey Pascuzzi · Answer

Massachusetts requires the deposit to be kept in a separate interest bearing acct.  when I went to open the account they required the W-9 Form to be filled out.  Another investor I know doesn't collect a deposit just to avoid the hassle.  I haven't looked into it to see if there is a way to get around it, I only have one property right now so not a problem.

Yuzi Stha · Answer

I am in a similar situation where bank is requesting W9 to be filled out by tenants, did you had any issue getting W9 from tenants?

Diana Ferrer · Answer

Hi,

I know this is an old thread, but I was wondering if any of you hold Sec Deposit and LMR for same tenant in same account? Here in MA landlord is responsible for paying interest to tenant on both Sec Deposit and LMR so I figure why not just deposit both in one. Lease clearly states what amount is Sec and what amount is LMR.

Barton Wallace · Answer

@CoreyPascuzzi I have mine in separate, interest bearing accounts with Rockland Trust, and I do not have to provide a W-9 from the tenant.

Marie S. · Answer

I open separate accounts, but I don't have 600 units (UNFORTUNATELY). That's beyond my imagination right now. I don't have the patience to figure out how to divvy up the interest paid per tenant upon move out for 7 units.

If a long term tenant (15-20+ year) moved out versus a tenant leaving after a year, I wouldn't imagine they would get equal amounts from the deposit pot.

Maybe @Enrique Jevons  can enlighten us on how that works. With 600+ units I'm sure he has some professional number crunchers on the team.

Enrique Jevons · Answer

Marie mentioned that most people open a single deposit account per tenant.  I currently have 623 units, all with security deposits, but I have all of those in one non-interest bearing trust account.  I do not mingle those funds with and other funds.  In the past 6 years I've been audited twice by the WA State Department of Licensing, and both times I passed the audit without any discrepancies.

If I had to set up a new bank account for each tenant, then I would be at the bank daily opening and closing accounts.  Are there landlords out there with over 600 different bank accounts?  That seems unmanageable.

Are you having tenants fill out a W-9 Form?

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