Tax Updates: It is common in lease agreements that tenants should pay a deposit before they move in

It is common in lease agreements that tenants should pay a deposit before they move in.

This deposit – refundable at the end of the lease term is mainly paid for two reasons – to secure the property against other interested tenants, and security against possible damages on the property by tenants.

Deposit as per the definition of gross income is mainly not for the benefit of the landlord because it needs to be paid back. So it would not be taxable in the hands of the landlord.

To be proved to be true that the deposit was not received for the benefit of the landlord, it should be kept in a separate trust account, earning interest for the benefit of the tenant.

If no such arrangement exists, the landlord should be taxed on the deposit that the tenants have paid.

However, if part of the deposit was used up by the landlord as compensation for damages affected by the tenant, then such would also make the deposit taxable in the hands of the landlord.

A deduction equal to the deposit can be claimed by the landlord accordingly as a tax expense.

– Update by Lazarus Amukeshe, Hdip Tax

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