Are Security Deposits includable as Rental Income?
1)Are the security deposits that I collect from my tenants included in my rental income?
Generally speaking the IRS has specifically stated that the taxpayer should "not include a security deposit in your income if you plan to return it to the tenant at the end of the lease."
However, if the Taxpayers were to "keep part or all of the security deposit during any year because the tenant damaged the property or did not live up to the terms of the lease, this money is taxable income in the year this determination is made." Furthermore, the IRS has stated that "If the security deposit is to be used as the tenant's final month's rent, you include the money as income when you receive it, rather than when you apply it to the last month's rent."
2)If not, what if I deposit these in my operating account and end up spending these, would these be taxable to me?
As such, if you plan to return the monies back, then it does not matter whether you commingle the deposits with your operating account. If you do not plan to return the monies back to the tenant then clearly it is includable as rental income.