Tenant lease break, penalty & tax implications

[William C.]

We have a tenant that was signed to a lease through Feb. of 2023. They have decided to break that lease and pay out the remainder of the lease in a lump sum. In the state the property resides in, we have a duty to mitigate. So if a suitable tenant is located within the lease window, we must pro-rate that lump sum penalty and kick it back to the previous tenant (we cannot double rent the property). If we are unable to locate a suitable tenant, then we will have received the equivalent of two additional rent payments in 2022 that should have been received in 2023 (Jan, Feb). These rent payments are sizeable and they will have an effect on our tax planning for the year (we will outstrip depreciation now). We do retain a property management company and after asking them, they must distribute the lump sum to us upon receipt (they cannot hold it off until 2023). Anyone out there have experience with a similar scenario? We are trying to see if there is a path for delaying receipt of the 2023 money so that our tax planning can stay intact. Any guidance offered would be greatly appreciated. Thank you.

[Drew Sygit]

@William C. not sure why your PMC can't hold the funds?

We've done it several times and actually WILL NOT disburse a lump sum to an owner, we will only disburse as future rents are earned. Besides this being correct per accounting requirements, we also do NOT want to have to chase an owner for a refund if something happens requiring a refund to a tenant.