Cash basis vs accrual basis at tax time

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Cash basis vs accrual basis at tax time

Joseph M.
Investor · Boulder, CO · Member since 2015 · 118 posts · 16 votes

I currently own a rental property in my name and was paid in advance for rent. I asked my accountant if we could account for it on an accrual basis and he told me that I wouldn't be able to. Can anyone provide some insights around this, as I am currently showing a good deal of profit which is lowering my tax return significantly? 

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Justin Reed
Youngsville, NC · Member since 2015 · 29 posts · 14 votes
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Brian Maida according to the IRS you need to recognize advance rent when received. Here is the link to the IRS website that highlights this information and some other tips on rent recognition https://www.irs.gov/businesses/small-businesses-self-employed/rental-income-and-expenses-real-estate-tax-tips Hope this helps
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  • Justin Reed
    Youngsville, NC · Member since 2015 · 29 posts · 14 votes
    8y
    Brian Maida according to the IRS you need to recognize advance rent when received. Here is the link to the IRS website that highlights this information and some other tips on rent recognition https://www.irs.gov/businesses/small-businesses-self-employed/rental-income-and-expenses-real-estate-tax-tips Hope this helps
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  • Account Closed
    Real Estate Broker · FREDERICKSBURG, VA · Member since 2018 · 30 posts · 36 votes
    8y

    Any chance you overlooked any expenses that might help offset this tax hit in 2017? Did you just get the rental up and running last year and do significant repair or rehab? Did you capitalize any rehab expenses that instead could've been expensed under the safe harbor election (up to 10k or 2% of the unadjusted basis)? Start beating the bushes on any way to offset the income. Good luck!

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  • Dave Toelkes
    Investor · Pawleys Island, SC · Member since 2008 · 1k+ posts · 837 votes
    8y
    Originally posted by @Joseph M.:

    Can anyone provide some insights around this, as I am currently showing a good deal of profit which is lowering my tax return significantly? 

    Profit is your gain on a sale.  Cashflow is the amount of money left over after you pay your rental expenses from your rental income.  Your tax return is the set of forms you send to the IRS.  Your tax refund is the excess withholdings given back to you after your tax bill is paid.  

    I don't understand your problem.  You always pay less in taxes than your income.  I can't wait for the day when my income tax liability is $1 million -- just means I made a ton of money over and above what I owe in taxes.

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  • Basit SiddiqiBusiness Member
    Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
    8y

    The IRS requires you to report rental income in the ear that you received it.

    Is it possible that the payment was a security deposit? if it was a security deposit - that is not taxable.

    One good thing to look at is that the following year you would only report 11 months of income(unless he prepays again).

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  • Joseph M.
    OP
    Investor · Boulder, CO · Member since 2015 · 118 posts · 16 votes
    8y

    good point @Basit Siddiqi Some of the money was a prepayment for 2017 rent and the rest was a deposit for 2018 rent which would be applied to 2018 on January 1 after an inspection. 

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