Chapter 3, Problem 82P

Lorene, Inc., owns an apartment complex. The terms of Lorene’s lease agreement require new tenants to pay the first and last month’s rent and a cleaning deposit at the inception of the lease. The cleaning deposit is returned when tenants move out and leave their apartment in good condition. If the apartment is not in good condition, Lorene hires a cleaning company and uses the tenant’s deposit to pay the cleaning bill, with any excess deposit returned.

During the current year, Lorene receives monthly rents totaling $28,000, last month’s rent deposits from new tenants of $8,000, and cleaning deposits of $7,000. Lorene keeps $5,000 in cleaning deposits to pay the cleaning company bill on apartments that are not left in good shape (the $5,000 is the actual cost that is paid in cash to the cleaning company) and returns $4,000 in deposits. Lorene’s expenses related to the rental property (other than the cleaning costs) are $14,000. What is Lorene, Inc.’s gross income from the rental property if Lorene is a cash basis taxpayer? an accrual basis taxpayer?