LO.2, 5 The Bluejay Apartments is a new development and 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. Discuss the tax effects of the following alternatives:

• $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.

b. Which option do you recommend?