Question

Clarissa owns a rental house. Her current tenant, Corey, signed a two-year lease and moved into the house in January 2023. At that time, Corey paid Clarissa $1,500 for the first month's rent and $1,500 as a refundable security deposit. Corey paid the $1,500 rent in cash on the first of each month during the year, except in November when he replaced the water heater in exchange for his rent. The water heater would have cost Clarissa $1,300 to purchase and install. How much rental income must Clarissa report for the tax year?

Answer 1

To determine how much rental income Clarissa must report for the tax year, we need to account for the cash received as rent and the value of any non-cash rent received.

1. Cash Rent Payments:

   • Corey paid $1,500 in cash each month for the first 10 months of the lease (January through October).
   • For November, Corey replaced the water heater instead of paying cash rent. Since the water heater's value is $1,300, we include this amount in rental income. However, we will calculate the total cash for the first 10 months separately, then add the value of the water heater.

   Cash rent for January to October: \[ 10 \text{ months} \times $1,500 = $15,000 \]

2. Non-Cash Rent Payment:

   • In November, Corey replaced the water heater which Clarissa valued at $1,300.
   • So, for November, we will count $1,300 as rental income.

3. Total Rental Income:

   • Total cash rent from January to October: $15,000
   • Rental payment in November (value of the water heater): $1,300

   Now we can calculate the total rental income: \[ $15,000 + $1,300 = $16,300 \]

Therefore, Clarissa must report $16,300 as rental income for the tax year. The refundable security deposit does not count as income until it is forfeited, so it is not included in this calculation.