What portion of the security deposit does Larry need to report as rental income?

In considering rental income and security deposits, it is important to understand how security deposits are treated under tax law. Generally, security deposits are not considered income until they are forfeited by the tenant, such as in cases of damage beyond normal wear and tear or failure to fulfill lease terms.

If the security deposit is fully returned to the tenant, it should not be reported as rental income at all. Therefore, if Larry has retained a portion of the security deposit as income—for instance, for damages, cleaning fees, or other permissible deductions—he would report that amount in the income section of his tax return.

The specific amount Larry needs to report would be based on the circumstances surrounding the security deposit. If he determined that $1,400 was retained due to damages or fees incurred, that would be the amount reported as rental income. Thus, reporting $1,400 as income reflects the income Larry has rightfully earned through the transaction, assuming this aligns with the actual damages or fees assessed beyond usual wear and tear.

Overall, it is essential for landlords to understand that only the portion of the security deposit that is neither returnable to the tenant nor considered refundable should be accounted as rental income when filing taxes.