Who pays taxes on the interest a rental deposit generates?

It depends on who winds up with the money. When I was a landlord in DC I was required by local law to hold the security deposit in an escrow account and pay the interest to the tenant annually. I then treated the interest paid as "nominee" interest, and only the tenant had taxable income from it. See the instructions for Schedule B of the 1040 and the 1099 series.

snipped-for-privacy@gmail.com ( snipped-for-privacy@gmail.com) posted this query:

States may have legislation which would affect this issue. Normally, such interest would properly be held in escrow, and any interest might be credited as miscellaneous income to the property, if the escrow account pays interest.

I'm not aware of any IRS specific mention of this issue.

Bill

But then it would be double tax, right?

Was any tax paid on big interest payment that was added to the deposit? In general, gradual interest payments are better though as they keep you from going to a higher tax bracket, but the amounts here are probably very small.

Really not following here. Do I pay the taxes on the deposit interest or does the tenant? It's in a bank, accruing interest. I get a INT form at the end of the year with this amount. I pay the taxes on this even though it's the tenants money?

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As mentioned, you set this as nominee interest. It is declared on your tax return and nomineed to the tenant. The tenant pays the taxes on the interest as it is their interest.

snipped-for-privacy@yahoo.ca posted the following as a sort of wrapup to my sidebar discussion of rental deposits:

I have no argument here, but simply wanted to clarify my original anecdotal comment: In those halcyon days, there was no such thing as "checking account interest" at most banks, and I simply allowed the deposit for my tenant to sit in the account I maintained for the rental property. There was actually no interest earned, no 1099 generated, and that's why I referenced my passing along "imputed interest" to the tenant as I returned the security deposit.

I don't know whether she reported it, and I certainly didn't issue any report, other than the Schedule E equivalent for that era -- and I don't recall how I handled the "interest" ... which was a very minor amount in those low-rent days. (This was long before I became an avid student of taxes.)

Bill

The escrow accounts I use pay a ridiculously low interest rate, something like 0.15%. For the amount of interest this generates every year, I just pay the taxes myself, because it is not worth it to me to do the paperwork to shift $5 of income to each tenant.

How do I set nominee interest. What forms?

========================================= MODERATOR'S COMMENT: please trim the post to which you are responding

True. But there must be an accounting rule or something for this conundrum. (There are times when rate are higher and if you have multiple high end properties .... ) It doesn't make sense for the landlord to pay taxes on interest on a deposit that is returned to a tenant. A tax credit for the taxes paid on interest on a deposit returned to a tenant seems like a good idea.

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