Tax Implications for Renter Paying Full Year?

Question

Hi, I am new to the Bigger Pockets forum and to REI.  I am an "accidental landlord" and am renting out a townhouse that was my personal residence.  I decided to become a landlord because my townhouse development is still building, so I would be taking at least a $15k loss if I sold it vs. renting. I decided at the very least I would gain the equity on the property by renting as my numbers do not support profit/cashflow right now.

It was difficult to find a tenant (hired a realtor) and we finally found one after 2 months vacancy.  She had self-reported bad credit due to a situation out of her control, and offered to pay a full year in advance.  I know on principle this was a big no-no based on what I've learned from bigger pockets, but because of the specific circumstance I do not regret renting to her and she has been a great tenant so far (keeps the place cleaner than I have, accommodating and communicative).

Anyway, all this to ask for advice on what to expect and avoid for tax purposes because she paid a full year in advance.  It was my personal residence from January - end of March, vacant for April and most of May, and the lease is 5/23/17-5/23/18.

Thanks in advance!

Roy N. · Answer

@Cody L.

Problems also come when and where you are not legally permitted to require or accept prepaid rent beyond the next payment period ... or where you are require to pay interest on the portion of the funds not immediately due.

Prepaid rent creates a liability for you legally, regardless of whether you run your business with cash-based or accrual accounting

Thomas S. · Answer

All advice so far is based on the belief that the advance rent payment is your money. The reality is that advance rent payment is not rent payment at all. You are holding the tenants money in trust and it remains their money until the rent amount is withdrawn from the account each month when due. The money is not yours and you may not use it for anything other than the monthly rent payments. The tenant is entitled to request her money back at any point in time.

You will only claim as income the actual portion of the money paid toward their rent during the calendar year. You also may owe the tenant any interest earned on the account during the period it is held.

Ashish Acharya · Answer

Rob,

Being a cash basis taxpayer, you have to report your income when you actually or constructively receive it. ( You constructively receive it when it is made available for you, so you cannot go pick up your rent on Jan 5th, 2017 and when it was made available on December 31st, 2016 and not report income for 2016.)

You have to include advance rent in your rental income in a year you receive it regardless of the period it covers.

Christopher Smith · Answer

I will assume you are a cash based reporter and there are no restrictions on any of the amounts collected (e.g., security deposit), in such case you would need to report as income the full amount collected in the year collected.