When is prepaid rent taxable?

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Sometimes tenants want to prepay the rent in advance, sometimes for a year or even multiple years. Initially, that sounds like a great thing to landlords because it means getting a big chunk of rent money up front. And it means you won’t have to worry about late or missing rent payments.  But how does that affect your taxes? Do you have to report that income entirely when you receive it?

Tax Reporting of Advance Rent Payments

Prepaid rent income is still taxable when you receive it, regardless of what period of time the rent covers.   So that means the rent you receive now is a taxable part of your income for this year, even if that rent covers multiple years into the future.   The same thing applies if someone pays back-rent this year that was overdue from last year. That rent is also taxable when you receive it.

Note that this is different from how expenses are treated. If you have expenses that cover a period of time more than one year into the future, then you can only deduct the portion that applies to the current year.

That means prepaid rent can have a big impact on your tax bill, and you may pay more tax than you would have if you hadn’t accepted prepaid rent. That’s because this year you’re reporting double the rent income that you normally would have, potentially pushing that income into a higher tax bracket, or at least making more of your rental income taxable than would have been. 

And then the next year you’ll be earning less income on the rental, so you may end up with more rental expenses than earnings. And in some situations, that negative income may not be deductible against your other income.   In that case, the net loss does at least carry forward to future tax years until it can be used to offset future income.   But even so, depending on how the numbers work out, receiving up front rent can mean paying more overall tax than you would have if you received the rent on a regular schedule.  

By the way, the same thing applies to prepaid rent that comes in the form of someone paying for the last month of rent up front.  Some leases require that the tenants prepay their last month of rent, and that income too would be taxable when it is received.  A security deposit, however, is not taxable when you receive it because it is not considered income unless you later keep part of it to pay for damages or other expenses.  It would only be counted as income when the tenant moves out and you return less than the full deposit.  

Other Reasons You Might Not Want to Accept Prepaid Rent

Aside from the tax concerns, there also tends to be a consensus among experienced landlords that accepting advanced rent is probably not a good idea. One of the major ones is the situation gets a lot more complicated if there are issues with the tenant, and you need to end the lease early, or possibly evict them. In that case, you would at least need to be prepared to pay back the unused portion of the prepaid rent. Experienced landlords also say that people who volunteer to prepay the rent have a tendency to be problem tenants. There are a variety of opinions on why that is, but many landlords consider it to be a red flag.

It’s appealing to accept a lot of rent money up front and not have to worry about late rent payments. But there are drawbacks to consider.

This article is part of The Ultimate Real Estate Investor Tax Guide.

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David Orr

I am a credentialed tax professional with a primary focus on tax preparation and advising for real estate investors. Have tax questions or want me to do your taxes? Contact us.

This article was written or updated in 2023 or 2024 and is current for the 2023 and 2024 tax years.

The information presented here is meant for guidance purposes only, and not as personal legal or tax advice.