when to claim rental deposit income

Question

Hi, I have short term rental properties renting by the week. I take a 50% refundable deposit at reservation time, then the balance 30 days before arrival. I take deposits up to a year before arrival. For tax purposes, I am using cash method, so I should claim the income when it is received. I had a CPA tell me that since it is refundable, that I don't have to claim it until it becomes nonrefundable (30 days before). This would significantly reduce my tax burden this year, but I want a second opinion on the legitimacy of this approach.

Thanks.

Jon Holdman · Answer

Dave T I think Stephen Race is referring to a different kind of deposit.  Not security deposits like you have on a long term rental.  Rather, these are deposits for the actual rent.  Like hotels sometimes take one nights deposit when you book the room, short term rentals often take a partial payment at the initial booking.  Sounds like Stephen is collecting 50% when the booking is made.  But its refundable up to 30 days before the arrival.  At that time, the remaining 50% must be paid and the entire amount is non-refundable.

Stephen, that's a very liberal policy, by the way.  Every time I've done a short term rental like this that initial payment has been non-refundable.  The owner sometimes stated refunds would be made if they had a new booking that covered the nights I booked, less various service fees.  They pointed me to travel insurance companies if I wanted protection against cancellation.

Dave Toelkes · Answer

The CPA was correct.  Deposits are not yours, they are your tenant's.  You are holding the deposit in escrow as security (collateral) for the cost of any damage to the property due to tenant abuse.  At the end of the lease term, if the property is in good condition, you must refund the security deposit.

A deposit is not income until it is forfeited.  At the time the deposit (or any portion thereof) is forfeited, it becomes additional rent which you can then offset with the cost of the repairs you had to make to put the property back into normal operating condition.

Steven Hamilton II · Answer

The deposit becomes income at the time in which it is forfeited.

Bill Gulley · Answer

Jon Holdman I think what we have here is more like a resort (could be almost anything, but what I was into in the past with cabins).

Due to the popularity of the resort, people make thier reservavtion up to a year in advance, very common as when they are there, they reserve the cabin for next year on or about the same time as thier expected vacation time. They do so because if they didn't, it would be rented by then.

On the accounting side, the reserve is a contingent liability, it must be repaid or returned if the customer makes the request, it is not earned income. As landlords or in RE, we would hold such funds in escrow accounts, that is not required for innkeepers, at least in my state. So the funds are held and simply put on the books as deposits reserved units. The reserve might be made on July 7 for next year for July 1-7. So long as there is no cancellation, funds remain on deposit as a contingent liability so as not to increase income or assets. On the next June 1st, the deposit becomes non-refundable by agreement and the amount is goes to deposits earned and may be treated as rents received, a prepaid rent on a cash basis. (Other systems could recognize it on June 1, as a deposit with services to be rendered or products to be provided as a liability and recognize the actual income as it is earned, by providing the service or product, but not in this case).

The reservation process really helps in cash management knowing that in most instances unit 17 is booked for July 1-7. If they cancel it can be rented within 30 days to some degree of certianty, if not and there is a no show, the customer fails to check in then you must hold unit 17 as they could be late. The unit could sit empty, but the expenses, fixed and variable costs of the unit are reduced, no maid services, no additional electric used, so the funds reserved should cover holding the unit. A policy of holding the unit is limited, say 24 hours, so on July 2, the unit may be rented at will. The reserve funds that were not allocated to any holding expense are income from rental units, along with any new rents collected. This may be overkill for units that are all the same, but having a 1,2 and 3 bdr cabins, community building reservations and considering usage of amenities on site by the population staying becomes important management considerations, there are varied costs. Add a bar/cafe and you get into order quanities for expected customers.

I'm sorry, it's early, I'm rambling again, so, Jon, your thinking that the allocation was basically correct, was correct, you would have made a good accountant if you had not become an engineer, probably the better choice.        :)

Jon Holdman · Answer

I'm something of a tax wonk, but not a CPA, so my opinion is only that.  I think its correct that when it becomes non-refundable it becomes income.  Until that point, you're just holding it.

I do think you should have some sort of fee if the guest cancels.  Unlike hotels, which often allow cancellations with full refunds up until close to the arrival, you have a real cost if someone cancels 30 days out.  You have the risk that you won't get another guest in that 30 day time frame and you'll actually lose the revenue for those nights.  I guess this depends on your guest profiles.  If you get a lot of last minute reservations, perhaps this isn't a big deal.

Stephen Race · Answer

Thanks Bill.  I read your first post, but I was not clear on the answer.  Your second post made it very clear.

Bill Gulley · Answer

Guess you missed my post, when it becomes non-refundable it becomes income. :)

Stephen Race · Answer

Thanks for the very fast responses.  John, you are correct and I agree it is liberal.  I try to use policy that I would prefer as a renter (maybe naively so :) )   The 50% deposit I take is refundable up to 30 days before the rental date.  The deposit is applied to the rental price.  So, does the fact that it is refundable make an argument for deferring recording it to 30 days before arrival (nonrefundable status)?

Bill Gulley · Answer

You have either rental income when you rented the rooms at that time and the deposit is applied to rents, or, if they are no shows, as the time expires for any refund it is other income, when you move the entries on your books at expiration from any escrow held to your operating accounts you recognize the income at that time. :)

when to claim rental deposit income

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