prepaid rent tax issues

6 Replies

I am about to sign a lease with a tenant who is paying the whole year upfront. It is mid November and I am concerned about having 10.5 months of rental income for 2016 being on my 2015 tax return. This will raise my tax bracket. Is there any way I can get around this problem?

Depending on your tax situation, could you prepay enough expenses to offset the (prepaid) income? Or, have you maxed out all tax deductions (IRA and/or Roth IRA contributions, HSA, etc)?

That way you are actually collecting all the rent upfront (and don't have to worry about "oh, I forgot -sorry" nsf when you cash the check on Jan 2nd).

Talk to your accountant or tax professional, they will have structures or ideas to help.

Originally posted by @Andrew Stewart :

Thanks everyone, I'll just accept all the mo ey up front and use the accrual method. I don't want to have to worry about a $20,000 nsf check Jan 1st.

 Just remember that you can't pop back and forth between methods at will.  If you change methods, you'll need to explain to the IRS why you're changing methods and then you'll have to stick to it.  You may also have some transactions from 2014 that are now applicable to this.

Additionally, you'll need to make sure you keep a very accurate set of books to account for Accounts Payable at year end as well as Accounts Receivable.

This can bite you in the butt in future years.  If you have a tenant that is past due on rent at the end of the year, you'll be declaring that income even if you haven't received it yet.