When a rented house is sold, the new owner is responsible for returning the security deposit at the end of the rental contract. But who has the right to deduct the security deposit on the IRS? According to the Tax Authority (AT), only the new owner can deduct the amount of the deposit as an expense in IRS matters.
By signing a rental contract, a landlord receives a deposit, which serves as a guarantee for the payment of the rent for the house (or another property). And at the end of the fiscal year, the landlord must declare this amount to the tax authorities, just like the other property income of category F, ultimately having to pay IRS on it. The tax compensation is only made when the contract ends.
However, if a taxpayer decides to sell the rented house and hands over the deposit amount to the new owner, they end up losing the right to deduct this cost on the IRS (that is, they lose the tax compensation), the AT revealed in a binding information released at the end of last month.
“In the case of the transfer of the right based on which the contract was established, it includes the transfer, to the new holder of the right, of the security deposit provided under that same contract. In this sense, the outgoing landlord [former owner] cannot deduct that amount as a cost incurred and paid since they are no longer the holder of the contract at the time of its termination,” reads the tax authority’s note.
In their understanding, the deduction of the security deposit on the IRS belongs to the new holder of the rental contract, who, moreover, has the obligation to return the amount paid as a deposit. For their part, the new landlord, by paying the deposit at the end of the contract, “has the right to consider that amount as an expense in the year it occurred under category F, since it is an expense that the taxpayer incurs to obtain property income related to the leased asset in the context of the rental contract in force until then,” they further clarify.
“If the one who actually bore this burden was not the current holder of the rental (landlord), but rather the original owner/landlord, then that amount could not have fiscal relevance, as there would no longer be any legal-tax justification for it to be considered fiscally,” the AT further understands.
In other words, even if the owner had not transferred the security deposit at the time of the sale and purchase of the rented property, they would not be entitled to the compensation on the IRS, since they would no longer be the holder at the end of the rental contract, the time when accounts are settled with the tax authorities.