Rental income received in advance

[taxmax]

My neighbor bought a rental property in Nov, 2009. Rental agreement
with the tenant was sighed on Dec. 2009. The start date of rental
agreement is Feb1, 2010. My neighbor received 6 months advance rent in
December. I was wondering whether the rental income should be shown in
2009 or 2010? I told my neighbor since the use and occupation of
property is in year 2010, the advance rent should be reflected in
2010, it makes since to reflect it in 2010. Did I give him the right
answer?

 

[removeps-groups]

My neighbor bought a rental property in Nov, 2009. Rental agreement
with the tenant was sighed on Dec. 2009. The start date of rental
agreement is Feb1, 2010. My neighbor received 6 months advance rent in
December. I was wondering whether the rental income should be shown in
2009 or 2010? I told my neighbor since the use and occupation of
property is in year 2010, the advance rent should be reflected in
2010, it makes since to reflect it in 2010. Did I give him the right
answer?

If your neighbor is a cash basis taxpayer then the rental income
belongs in 2009. This is based on the rules of constructive receipt.

 

[taxmax]

If your neighbor is a cash basis taxpayer then the rental income
belongs in 2009.  This is based on the rules of constructive receipt.

--

Although my neighbor is a cash basis taxpayer and the tenant will not
get the possession ion of the property until Feb 2010 and has not
moved in 2009, the payment is just an advance payment and should be
treated like security deposit in 2009. What do you think???

 

[Wallace]

Although my neighbor is a cash basis taxpayer and the tenant will not
get the possession ion of the property until Feb 2010 and has not
moved in 2009, the payment is just an advance payment and should be
treated like security deposit in 2009. What do you think???

What does the lease say?

from
http://www.irs.gov/businesses/small/industries/article/0,,id=98895,00.html :


When to Report Income

Report rental income on your return for the year you actually or
constructively receive it, if you are a cash basis taxpayer. You are a cash
basis taxpayer if you report income in the year you receive it, regardless
of when it was earned. You constructively receive income when it is made
available to you, for example, by being credited to your bank account.

For more information about when you constructively receive income, see
Publication 538, Accounting Periods and Methods.

Advance Rent

Advance rent is any amount you receive before the period that it covers.
Include advance rent in your rental income in the year you receive it
regardless of the period covered or the method of accounting you use.

Example:

You sign a 10-year lease to rent your property. In the first year, you
receive $5,000 for the first year's rent and $5,000 as rent for the last
year of the lease. You must include $10,000 in your income in the first
year.

Security Deposits

Do not include a security deposit in your income when you receive it if you
plan to return it to your tenant at the end of the lease. But if you keep
part or all of the security deposit during any year because your tenant does
not live up to the terms of the lease, include the amount you keep in your
income in that year.

If an amount called a security deposit is to be used as a final payment of
rent, it is advance rent. Include it in your income when you receive it.

 

[Stuart A. Bronstein]

Although my neighbor is a cash basis taxpayer and the tenant
will not get the possession ion of the property until Feb 2010
and has not moved in 2009, the payment is just an advance
payment and should be treated like security deposit in 2009.
What do you think???

Seems to me the alternative would be to treat the advance as a loan
until it is actually earned. So the question is, under the lease
does the landlord have the right to keep the money if the tenant
doesn't actually use the place? Or could the tenant change his
mind until he actually took possession?

 

[taxmax]

Seems to me the alternative would be to treat the advance as a loan
until it is actually earned.  So the question is, under the lease
does the landlord have the right to keep the money if the tenant
doesn't actually use the place?  Or could the tenant change his
mind until he actually took possession?

I ----I----------------------------------------------- >>
Stu, I agree with you. I had a chance to read the rental agrement. It
says that if landlord is unable to deliver the possession upon the
Commencement Date, the tenant can terminate the lease agreement.
Hypothetically lot of things could have happened between receiving the
advanced rent (Dec 2009) and Commencement of the lease ( Feb 1, 2010).
Luckily nothing happened. I guess treating the advanced rent as a loan
is justifiable.

Thanks for your input.
Toubi


The foregoing was not intended or written to be used,   >>

 

[D. Stussy]

If your neighbor is a cash basis taxpayer then the rental income
belongs in 2009. This is based on the rules of constructive receipt.

Accounting method doesn't matter. Advance rent collected is always taxable
in the year received, unless Section 467 applies. A security deposit is
not rent, but may be includible in income under certain circumstances (and
when included, its refund becomes deductible when returned).

TR § 1.61-8 Rents and Royalties:
(a) In general - These are included in GI
(b) Advance Rent - Advance rent is income and must be reported as GI in the
year of receipt regardless of the period it was actually used as rent.

See also:
Rev. Proc. 2004-34

CCH Paragraph 4395.
http://books.google.com/books?id=ct...rce=bl&ots=cAcEOrANfu&sig=q1NpN72li8tSVMaW0fZ
iogSTkZY&hl=en&ei=RhxzS8_2I46wsgPRtdWmBQ&sa=X&oi=book_result&ct=result&resn
um=4&ved=0CBcQ6AEwAw

 

[Stuart A. Bronstein]

Accounting method doesn't matter. Advance rent collected is
always taxable in the year received, unless Section 467 applies.
A security deposit is not rent, but may be includible in income
under certain circumstances (and when included, its refund
becomes deductible when returned).

TR õ 1.61-8 Rents and Royalties:
(a) In general - These are included in GI
(b) Advance Rent - Advance rent is income and must be reported
as GI in the year of receipt regardless of the period it was
actually used as rent.

In this case it appears that the payment was contingent and as a
result not yet earned. As such I'd argue that it's not taxable until
the contingencies are removed.

 

[removeps-groups]

Seems to me the alternative would be to treat the advance as a loan
until it is actually earned.  So the question is, under the lease
does the landlord have the right to keep the money if the tenant
doesn't actually use the place?  Or could the tenant change his
mind until he actually took possession?

Can this recharacterization (of rent received as a loan) be done after
the fact, and does it hold up in a court of law?

 

[Reggie]

I ----I----------------------------------------------- >>
Stu, I agree with you. I had a chance to read the rental agrement. It
says that if landlord is unable to deliver the possession upon the
Commencement Date, the tenant can terminate the lease agreement.
Hypothetically lot of things could have happened between receiving the
advanced rent (Dec 2009) and Commencement of the lease ( Feb 1, 2010).
Luckily nothing happened. I guess treating the advanced rent as a loan
is justifiable.

I don't buy it for a minute.

 

[Stuart A. Bronstein]

Can this recharacterization (of rent received as a loan) be done
after the fact, and does it hold up in a court of law?

It wouldn't be an actual loan, and probably can't be
recharacterized after the fact. But based on whether or not the
landlord actually earned it yet (e.g. subject to contingencies that
have a significant chance of taking place). If the tenant has a
realistic chance of cancelling the lease before taking possession,
it seems to me that the landlord hasn't earned it yet, and so is
not taxable on it.

For example a life insurance salesman sells a policy. He is given
a commission that is not only based on the initial premium, but on
expected payments over a period of time. The sales agent quits his
job and the purchaser of the policy stops paying. Some of what the
agent received is not earned and he has to give it back. So he
shouldn't be taxed on the portion that he had to give back because
it wasn't actually earned when it was received.

 

[Seth]

Can this recharacterization (of rent received as a loan) be done after
the fact, and does it hold up in a court of law?

I'd say it's a deposit, not a loan. The characterization depends on
the words in the lease, which was signed before the money was
transferred.

Seth

 

[D. Stussy]

In this case it appears that the payment was contingent and as a
result not yet earned. As such I'd argue that it's not taxable until
the contingencies are removed.

Under that argument, no advance rent would be taxable when received, and
that's directly contradictory to the TR.

 

[removeps-groups]

I'd say it's a deposit, not a loan.  The characterization depends on
the words in the lease, which was signed before the money was
transferred.

Deposit is income too. The remaining payment is the full price minus
the deposit -- the full price is income at the end of the day.

 

[removeps-groups]

It wouldn't be an actual loan, and probably can't be
recharacterized after the fact.  But based on whether or not the
landlord actually earned it yet (e.g. subject to contingencies that
have a significant chance of taking place).  If the tenant has a
realistic chance of cancelling the lease before taking possession,
it seems to me that the landlord hasn't earned it yet, and so is
not taxable on it.

For example a life insurance salesman sells a policy.  He is given
a commission that is not only based on the initial premium, but on
expected payments over a period of time.  The sales agent quits his
job and the purchaser of the policy stops paying.  Some of what the
agent received is not earned and he has to give it back.  So he
shouldn't be taxed on the portion that he had to give back because
it wasn't actually earned when it was received.

When the life insurance salesman receives his commission, he reports
the entire commission in the year received? I'm assuming this is the
case as this is what common sense tells me, though maybe the income
would be different if the salesman was on the accrual accounting
method. So in the year he quits and the client stops making payments,
he pays back part of his commission. He would then claim the amount
as negative income on his Schedule C. Or if he is paid as an
employee, his W2 income would be reduced by the payback. Or if he
paid in a year after he quit, he would file a claim of right to get
the money back.

So my description above is correct, and it applies to rent: Then
advance rent/commission would be income, should it be paid back in a
following year it will be negative income on Schedule E/A.

 

[Stuart A. Bronstein]

Under that argument, no advance rent would be taxable when
received, and that's directly contradictory to the TR.

Untrue. Advance rent, if earned (e.g. there is a lease that requires
it and there is no substantial grounds for forfieture) would still be
taxable when received under my theory. It's onlyl when there is a
substantial chance that the money will have to be repaid that, seems
to me, it would not be considered income when paid.

 

[D. Stussy]

Untrue. Advance rent, if earned (e.g. there is a lease that requires
it and there is no substantial grounds for forfieture) would still be
taxable when received under my theory. It's onlyl when there is a
substantial chance that the money will have to be repaid that, seems
to me, it would not be considered income when paid.

Then I assume you're using Form 8275-R for all your advance rent cases....

 

[Wallace]

Untrue. Advance rent, if earned (e.g. there is a lease that requires
it and there is no substantial grounds for forfieture) would still be
taxable when received under my theory. It's onlyl when there is a
substantial chance that the money will have to be repaid that, seems
to me, it would not be considered income when paid.

The fact that the lease says you don't have to pay rent if the property is
not delivered is not likely the type of contingency that means the rent is
not taxable as current income. Unless there is some special circumstances,
like the landlord is trying to buy out the remainder of a prior tenant's
lease, which is wholly up to the discretion of the prior tenant. I think
this is a run of the mill lease, and the advance payments are income in the
year received.

What does the lease say? Specifically.

 

[D. Stussy]

The fact that the lease says you don't have to pay rent if the property is
not delivered is not likely the type of contingency that means the rent is
not taxable as current income. Unless there is some special circumstances,
like the landlord is trying to buy out the remainder of a prior tenant's
lease, which is wholly up to the discretion of the prior tenant. I think
this is a run of the mill lease, and the advance payments are income in the
year received.

What does the lease say? Specifically.

Doesn't matter. The Treasury Regulation controls. Advanced Rent is
taxable when received, period.

 

[Wallace]

Doesn't matter. The Treasury Regulation controls. Advanced Rent is
taxable when received, period.

I agree with you on this one. But, if the lease says this advance payment
is something other than rent, we should consider what it says. Of course,
it doesn't. So, what does the lease say? That this is rent, which happens
to be paid in advance, either because it is required by the lease to be paid
in advance, or for the convenience of the tenant. Either way, if it is
rent, it is rent.