Problem $4-43($LO$.2,6)$

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The Bluejay Apartments, a new development, is in the process of structuring its lease agreements. The company would like to set the damage deposits high enough that tenants will keep the apartments in good condition. The company is actually more concerned about damage than about tenants not paying their rent.

a$.$Indicate the tax effects of the following alternatives:

$$1,000$ damage deposit with no rent prepayment.

Part taxed in the year of receiptAll taxed in the year of receiptNone taxed in the year of receipt

$$500$ damage deposit and $$500$ rent for the final month of the lease.

Part taxed in the year of receiptAll taxed in the year of receiptNone taxed in the year of receipt

$$1,000$ rent for the final two months of the lease and no damage deposit.

Part taxed in the year of receiptAll taxed in the year of receiptNone taxed in the year of receipt

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b$.$Which alternative do you recommend to maximize deferrals without affecting cash flows?

$$1,000$ damage deposit with no rent prepayment.$$500$ damage deposit and $$500$ rent for the final month of the lease.$$1,000$ rent for the final two months of the lease and no damage deposit.