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Our property manager skipped town with about 6 mos of rent and the security deposit. The State has a fund to help make folks who are ripped off by crooked realtors whole. We got a payout from this fund and are trying to figure out how to treat it. Assume it needs to be considered income. But, it would be great if not. If so, only the part of it that was for rent and not the part for the security deposit would be considered income, correct? Also have a question about the timing of the income -- the check from the State was cut in 2012 but wasn't received until 2013 -- can we choose when to recognize the income?
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only the part of it that was for rent and not the part for the security deposit would be considered income, correct?

I'd treat it as you would have treated the funds if you got them directly from the property manager. So yes, rent income for the rents and non-taxable for the security deposit.

Also have a question about the timing of the income -- the check from the State was cut in 2012 but wasn't received until 2013 -- can we choose when to recognize the income?

Assuming you are on the cash basis of accounting (and you almost certainly are unless you KNOW that you're not), you recognize income when received or constructively received.

Why was the manager holding six months of rent? More specifically, had you asked sooner, would you have been able to get that rent from them? Could you have asked for that rent at any time?

I'd say that as long as you had the ability to demand the rent money from the manager at any time, you constructively received the rent when the manager received it. So you'd recognize the income in whatever year the manager received it.

--Peter
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as long as you had the ability to demand the rent money from the manager at any time, you constructively received the rent when the manager received it.

If the manager stole the money, arguendo, would the owner still have constructively received it when the manager did? The owner's demand would not have been complied with.

Eric Hines
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He wasn't actually holding it -- he'd spent it and been telling me that the tenants were late....when he bounced a check to me it dawned on me he might not be telling the truth and that's when he stopped returning my emails... - the judge in small claims court asked me why the I didn't pursue him with law enforcement for the bad check and fraud -- it used to be a crime to bounce a check -- still is -- but, at least in that county, they don't have time/resources to go after it....anyway -- thanks for your input -- I appreciate it.
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It seems to me that you have a casualty loss for the theft of rent. If so, then the payment from the state would be the same as an insurance reimbursement - nontaxable unless it exceeded your loss.

Ira
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He wasn't actually holding it -- he'd spent it and been telling me that the tenants were late...

Well, yeah, that's what they really did.

I was asking more about the more formal terms of your agreement with the property manager. What did your property management agreement say about the manager holding the rents?

--Peter
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What state? It would be a good thing to know for any of us who may find ourselves in that situation in the same state that there is reimbursement available.
Recognize the income when you received it. It is simply late rent as far as you are concerned, irregardless of the date of the check.
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Recognize the income when you received it. It is simply late rent as far as you are concerned, irregardless of the date of the check.

It was probably income when the property manager collected the rent on behalf of the owner.

The manager's theft of the money and subsequent reimbursement for the theft loss are separate issues.

--Peter
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I like Ira's answer -- I'm gonna consider treating it that way in good faith and hope for the best -- it was MN and the cop that was investigating the case told me about it -- they apparently fund this pool of money from broker penalties and license fees...the state requires you get a judgement from the court system and then, when you can't enforce it because the guy's a deadbeat, you can apply for relief.. -- thx. to all for your inputs.
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I like Ira's answer

Ira will correct me if I'm wrong, but I'm pretty sure he was also assuming that you had already reported the stolen rents as income first.

My concern here is that you can't have a tax-free benefit. You either report the stolen rents as income when the manager received them and then the reimbursement from the state's fund is a non-taxable recovery of the loss, or you don't report the rent from the tenant and then report the payment from the state's fund as income.

Pick one or the other. But not reporting the rents AND not reporting the reimbursement could get you into trouble.

--Peter
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I like Ira's answer

Ira will correct me if I'm wrong, but I'm pretty sure he was also assuming that you had already reported the stolen rents as income first.


What Peter said.

Ira
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