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Updated over 5 years ago, 06/19/2019
Massachusetts Tenant wants to pay 9 months up front
So we are showing an apartment and a tenant came back clear but she wants to pay 9 months worth of rent upfront immediately. I tried looking up any problems with this on mass.gov but couldn't find a thing. Could anyone think of any legal implications this could have?
#4 Tax, SDIRAs & Cost Segregation Contributor
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#4 Tax, SDIRAs & Cost Segregation Contributor
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- Atlanta, GA
Figure out why she wants to pay 9 months of rent upfront immediately.
Why is she doing you this favor?
@Eamonn McElroy her reasoning was because is coming from another state and switching jobs. She will only have her veterab military pension while shes searching getting a new job out here. She said she wants to take a couple months to be with her kids that just had kids and then start to looks so she doesn't want it to be a problem. I was concerned more about taking a payment that large and holding it. I didn't know if there was a process that needs to be done to hold that and keep it.
@Steve Bracero they passed initial screening I don't require a W2 it's a credit and background check and a job reference and landlord reference. I've yet to hear back from the landlord reference.
Hi Mike,
There might be accounting issues. It's probably best to run this by your CPA.
Good Luck!
I don't know if there is a process either but to a certain extent you will owe it back to her if she leaves early so I would be inclined not to take it. Maybe have her set up a separate bank account and put it on autopay. She is probably trying to ensure she gets the place by making this offer.
In Massachusetts the law is very specific on what deposits can be made for a rental. Security, first and last and a licensed agent/broker can charge a broker fee. Deposits outside of that can be considered a Fair Housing violation if it's taken as part of your consideration for his/her approval.
Things like pet deposits and roommate charges are even questionable but the site has a number of threads about it!
I'd take the security, first and last and call it a day. If she doesn't like the space or the landlord wants to evict it would become very complicated!
Per Mass Law;
(4) Security Deposits and Rent in Advance. It shall be an unfair or deceptive practice for an owner to: (a) require a tenant or prospective tenant, at or prior to the commencement of any tenancy, to pay any amount in excess of the following: 1. rent for the first full month of occupancy; and 2. rent for the last full month of occupancy calculated at the same rate as the first month; and 3. a security deposit equal to the first month's rent; and, 4. the purchase and installation cost for a key and lock.
or, at any time subsequent to the commencement of a tenancy, demand rent in advance
in excess of the current month's rent or a security deposit in excess of the amount allowed
by 940 CMR 3.17(4)(a)3.
@Mike Fontaine you can certainly do that but I would look a little further into why she's doing that. double check her revenues to ensure that she does receive a monthly income that will support the rent after the nine months is up.
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#4 Tax, SDIRAs & Cost Segregation Contributor
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If it's a 12 month lease, have you qualified her income alone with the military pension?
Otherwise you're banking on her getting a job by month 9....
@Brad Brady that says you cant demand it, it does not say you cannot accept it
@Mike Fontaine - I have had this happen to me and I have not taken the money. In my opinion, it is a red flag for two reasons.
This is a tactic that a lot of bad tenants will try. They hope that if they wave a ton of money in front of the landlord, he will just grab the money, hand then the keys, and not go through the tenant screening process.
Lastly, tenants are notoriously bad at budgeting, saving, and managing cash flows. Because they gave you all this money up front, they probably don’t have much left to handle any unexpected problems or bills.
One of the most important things for a new tenant and landlord relationship is to get into a good rhythm of the tenant getting paid, paying rent on time, and paying bills on time.
@Eamonn McElroy good point, if she is unable to get a job after the period it could leave us in a wierd spot
@Mike Fontaine
Does your checks also include nationwide eviction check? I would also be leery of taking advanced rent. She could simply ask for most of the money back as soon as she moves in. The money is not yours to keep until each first of the month rolls around.
@Anthony Wick we saw it as way to much of a red flag and decided to go with another tenant. But yes, completely background and credit check with eviction records.
It sounds like this is no longer an issue since you rented to someone else, One other thought from an IRS perspective - if you collect rent in bulk, as a cash basis taxpayer you pick it all up in income in the year it is collected. Not as much or a problem earlier in the year, but last year I had 2 different clients take the check for a 9-12 months up front at the end of the year, and you are left paying the tax bill earlier then you need to.
@Mike Fontaine Could you not take the 9 months rent and change the lease to 9 months and make the last three month to month? That way you got your money up front. They have the place for 9 months. Both have the option to continue on for the next three. Either way if they are late after 9 months you will still have to evict.
@Kory Reynolds
How does that work then if January 1 the tenant asks for their up front money back, and then doesn’t pay rent ever again? And if a landlord merely claims the income month to month, how would the IRS know? Landlord is still claiming 100% of rents as income.
@Anthony Wick
In our practice we don't execute anything based on "The IRS would never know" - they don't know a lot of things that they could only find if you were under audit. In the scenario you outlined, there are only 2 ways that I can think of right now that they would find out about your misreporting outside of an audit - if this was a commercial client that files 1099s, or if you file a partnership or scorp return and present a balance sheet that includes prepaid rent and is a cash basis return.
Cash income is recognized if you have constructive receipt as of the last day of the tax year. This means that as of midnight 12/31 you had full control of that cash and can run out and spend it. If it is income like rent, even if it is collected as of 12/31 but you don't deposit the funds, it is still income in that year for tax purposes.
If the tenant demanded a refund on 1/1, the boy scout answer is too bad, you had constructive receipt as of 12/31. In this scenario you would take a write off in the following year. In this scenario if there was situation arising on or before 12/31 that lead to the refund request, and you have support of that, then maybe you can argue that you didn't have constructive receipt if the IRS takes a look. What you outlined I see parallel to having the heater replaced on 12/31 but you don't pay until 1/1 - you held that cash through year end, so you don't get to take the expense in that year as a cash basis taxpayer.