You are renting out a property, and your tenant has now given notice.

That is part of being a landlord, so there is nothing unusual about that. But now there is a lot you need to deal with – besides finding a new tenant, of course.

A move-out inspection must be conducted before you know how much needs to be refurbished, and after that, the refurbishment must be initiated. This affects the amount of the deposit that must be refunded before the new tenant can move in.

So… there is a lot to do! Let’s get started!

Move-out inspections and tax matters

Some of the tax-related matters you should be aware of include your tenant's deposit and documentation for repairs and refurbishment of the property while your tenant lived there. If the financial conclusion of your tenancy agreement ends up being quite different from what you expected, you may also need to adjust your preliminary income assessment so you have an overview of your expected tax when the year is settled and your tax return (information form) needs to be completed.

Want to know more about taxes on rental income? Read more here

Deposit

So, how is a tenant's deposit viewed from a tax perspective?

A deposit is a debt. You owe your tenant the amount corresponding to the deposit paid when the tenant moved in. Since the deposit is not income, it means that you do not have to pay tax on the amount. It is therefore not included in your income like rent is.

Refurbishment

To determine how much of the deposit should be refunded, you must calculate the costs of the refurbishment.

You must ensure that you have invoices/receipts for all expenses. This applies to both materials and hourly wages if you have hired contractors. If, on the other hand, you have done the refurbishment yourself, you can only deduct the costs of the materials from the deposit. Not an hourly wage for yourself!

Deductions when changing tenants

Expenses related to refurbishment must be deducted from the deposit, but they are not tax-deductible. Since the deposit is not income, you cannot claim a deduction for expenses that are covered by that amount.

As a general rule, you therefore have no tax deduction in connection with a tenant moving out.

Sometimes it may happen that the costs of the refurbishment are higher than the deposit paid. In that case, you must collect the extra money from your tenant. In this situation, you must also ensure that you document the actual expenses you have incurred in connection with the refurbishment.

If the tenant does not pay, or if it is not possible for you to collect the money, you can deduct the amount in your tax return that is not covered by the deposit. You can also deduct amounts if you have incurred legal fees in connection with handling your tenant's non-payment.

If it is a very large amount, it may also be a good idea to update your preliminary income assessment.

Need help?

If you would like help with your residential rental, your preliminary income assessment, or your tax return, then create a free account on Reportability and try it out with your own figures to see how easy it is to get a complete handle on rentals and tax! With Reportability, you can easily and securely achieve optimal tax conditions! And you are always welcome to ask us for help. Use the chat, for example, and get quick answers to your questions. You can read more about Reportability and residential rentals here.

Perhaps you are also looking for a great digital tool for move-out inspections? Then you should visit our digital friends at DomuSpect here: https://domuspect.dk/ (By the way, it is their tool we have borrowed images from for this post). With DomuSpect, you can easily and for free conduct move-out inspections for your rental property!