The Bluejay Apartments, a new development, is in the process of structuring its

Question

The Bluejay Apartments, a new development, is in the process of structuring its lease agreements. The company would like to set the damage deposits high enough that tenants will keep the apartments in good condition The company is actually more concerned about damage than about tenants not paying their rent. Discuss the tax effects of the following alternatives: $ 1,000 damage deposit with no rent prepayment. $500 damage deposit and $500 rent for the final month of the lease. $ 1,000 rent for the final two months of the lease and no damage deposit. Which option do you recommend? Why?

Explanation / Answer

Tax Effects

Option 1 - There is no tax on damage deposit kept as it is not revenue income.

Option 2 - Tax need to be paid on rent being income and not on damage deposit.

Option 3 - Tax need to be paid on rent being income.

I would recommend option 1 as there is no tax.

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