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Dear Tax Talk,
I own a residential rental. The manager did not send out my final 2013 payment (December) until the 31st of December. I did not have use of the money for my mortgage payment. Can I claim that income on my 2014 taxes since I did not receive it in 2013? Also, my Form 1099 from the manager will include the late December payment even though she collected it on the 13th of December and I did not receive it until Jan. 4, 2014.
This is a very common occurrence at the end of the year, as many individuals and businesses wait until the end of December to pay expenses since they want the deduction in the current year.
Generally, most individuals and many small businesses use the “cash” method of recording their income and expenses. They record income when it is received and expenses when they are paid. There are special rules for paying expenses in advance, but I will not go into that in this column.
The IRS rule is that you include in your gross income all items of income you actually or constructively receive during the tax year. There are other accounting methods that you can use, but based on your question, it seems that you are using the cash method.
In your situation, the definition for the term “constructively” is going to provide you with your answer. According to the IRS, income is constructively received when an amount is credited to your account or made available to you without restriction. You need not have possession of it. If you authorize someone to be your agent and receive income for you, you are considered to have received it when your agent receives it. Income is not constructively received if your control of its receipt is subject to substantial restriction or limitations.
Since your agent, the manager, had already received the income on your behalf in December 2013, that is the date that you constructively received it and thus the answer is no, you cannot wait until 2014 to claim the income, as you must claim it in 2013.
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To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek professional advice based on their particular circumstances.