Flipper/Rehabber · San Francisco · Member since 2014 · 124 posts · 49 votes
Yep, 15 months. She's not a drug dealer, but she is receiving a very large divorce settlement, has no income, will be going to nursing school. She is worried that without income she'll have a hard time getting approved. I have no problem taking her money, but I'd rather not have to claim the income all on one year's tax return. If we sign the lease in May, then I'd be receiving an extra $8000 in 2015 income that normally would go in 2016.
Anybody familiar with this? Without delaying payment, is it possible to defer the income until 2016? Maybe in the form of a deposit that get's call due on 1 Jan? I'd like to make this as simple as possible for the tenant.
Property Manager · Big Bear Lake, CA · Member since 2013 · 585 posts · 330 votes
11y
You are not supposed to use the money until it is "earned". That means, leave it in an account and only withdraw each month's worth of rent on the 1st of each month. Then just claim the income from the months that you used the money.
Another reason not to spend the money is if she decides to leave early and wants her money back, you will have to give it to her, if you re-rent the place.
Clemson, SC · Member since 2012 · 82 posts · 19 votes
11y
How are you handling the accounting for your properties - cash or accrual? If it's accrual, it's not an issue since you will only recognize what you have earned (May-Dec). If it's cash, I'm not sure - check with your accountant. Worse-case scenario is that you have a higher tax bill this year from the additional income, but a lower tax bill next year from the reduction in income (since half of the year's income was recognized the year before).
Property Manager · Big Bear Lake, CA · Member since 2013 · 585 posts · 330 votes
11y
You are not supposed to use the money until it is "earned". That means, leave it in an account and only withdraw each month's worth of rent on the 1st of each month. Then just claim the income from the months that you used the money.
Another reason not to spend the money is if she decides to leave early and wants her money back, you will have to give it to her, if you re-rent the place.
Yep, 15 months. She's not a drug dealer, but she is receiving a very large divorce settlement, has no income, will be going to nursing school. She is worried that without income she'll have a hard time getting approved. I have no problem taking her money, but I'd rather not have to claim the income all on one year's tax return. If we sign the lease in May, then I'd be receiving an extra $8000 in 2015 income that normally would go in 2016.
Anybody familiar with this? Without delaying payment, is it possible to defer the income until 2016? Maybe in the form of a deposit that get's call due on 1 Jan? I'd like to make this as simple as possible for the tenant.
Check about your local and state laws, some states have provisions on how much, and how far in advance you can accept rent.
Investor · in, MI · Member since 2013 · 226 posts · 102 votes
11y
Prepaid rent is a liability account item as it is not "yours" all in advance, you use it up as you go. If for some reason she breaks the lease and moves out and you get it re-rented in a timely manner, she would be due back the balance of her money.
Guy with Great Hair · Austin, TX · Member since 2013 · 2k+ posts · 4k+ votes
11y
Check local laws, this isn't legal everywhere.
Also, if you do it, don't spend that money. For whatever reason if she breaks lease and you have 4-5k of hers, I can't see any judge letting you keep that money.
Use the search function, this comes up a lot and while it seems like a slam dunk it's generally not good practice and for good reason.
Property Manager · Long Beach, CA · Member since 2015 · 31 posts · 12 votes
11y
Here in CA with our company, we do not take any lump sum up front. It sounds enticing, but can give you trouble later on, especially if the tenant is a bad tenant - loud, damaging unit, etc. when it comes to a possible eviction or serving a 60-day notice. You could have her give you post-dates checks for each month, and just deposit them each month. Just an idea.
Flipper/Rehabber · San Francisco · Member since 2014 · 124 posts · 49 votes
11y
Well I looked it up, and there is an explicit Florida Statute concerning advances of rent, specifically Title VI Chapter 83.49 "Deposit money or advance rent; duty of landlord and tenant".
You have to place it in the same account as the security deposit, and not co-mingle with other funds. You may only withdraw the rent as it comes due. So there no benefit or ability to take it and do other deals, but a ton of insurance for timely payments... The rules on using the said rent in any manner than regular payments are governed by the same rules as the security deposit.
That also answers my taxable question; since I cannot withdraw the money until I earn it in the month it is due, I won't be taxed on it until then as well.
Real Estate Broker · Provo, UT · Member since 2013 · 689 posts · 511 votes
11y
I've not had any great experiences with prepaid rent, but I have had one extremely horrible situation that taught me to never except prepaid rents ever again. It only took one time for me to learn that it's not for me.
I've found there is a strong sense of entitlement that a tenant quickly develops when they have paid a few months in advance - and evictions are already painful enough, but this makes them harder.
If it were me I would reject the plan - your state may require the money to be held in a specific trust account and you probably don't want to do that. If it comes down to it she can always pay an escrow company to distribute the funds each month - so you know the money is coming, but you're not the one holding the cash until the service (tenancy) is rendered.
If she's in the middle of a divorce she may be able to have her legal counsel distribute funds.
I've not had any great experiences with prepaid rent, but I have had one extremely horrible situation that taught me to never except prepaid rents ever again. It only took one time for me to learn that it's not for me.
I've found there is a strong sense of entitlement that a tenant quickly develops when they have paid a few months in advance - and evictions are already painful enough, but this makes them harder.
If it were me I would reject the plan - your state may require the money to be held in a specific trust account and you probably don't want to do that. If it comes down to it she can always pay an escrow company to distribute the funds each month - so you know the money is coming, but you're not the one holding the cash until the service (tenancy) is rendered.
If she's in the middle of a divorce she may be able to have her legal counsel distribute funds.
I see these threads on occasion and this is the best advice I've ever seen to solve the issue. NICE!
Well I looked it up, and there is an explicit Florida Statute concerning advances of rent, specifically Title VI Chapter 83.49 "Deposit money or advance rent; duty of landlord and tenant".
You have to place it in the same account as the security deposit, and not co-mingle with other funds. You may only withdraw the rent as it comes due. So there no benefit or ability to take it and do other deals, but a ton of insurance for timely payments... The rules on using the said rent in any manner than regular payments are governed by the same rules as the security deposit.
That also answers my taxable question; since I cannot withdraw the money until I earn it in the month it is due, I won't be taxed on it until then as well.
Well, she's offering you the money up front so you'll take her. What you might want to do is verify that she's really going to be going to nursing school. She'll probably have emails from the college that she can forward to you to verify her story is legit. This is what I required from college students I rented to. I wanted proof that they were students in good standing. Or at least an acceptance letter or their financial aid award, etc.
I'd rather have her money in my account, rather than her attorney's account or some other escrow account I did not have control over. There's no guarantee she won't break the lease or spend all her money and you will have no recourse to get unpaid rent or damages. Plus, depending on her situation, she could end up filing bankruptcy on what she owes you.
But, if you have the money and it's up to you to reimburse her what you owe her, after you deduct your rent and damages - that's a much sweeter position to be in, in my opinion. She can't file bankruptcy on money she already paid you.
She's offering you insurance. I say take it. And since the tax issue is not a problem, I wouldn't worry about it.
And as far as tenants getting an entitled attitude - first of all, someone in nursing school will be very busy and very tired. Grad students are really low maintenance in my experience. And if she gets demanding, just smile and educate her on landlord-tenant law. And if she gets too obnoxious, offer to let her out of the lease. I used to say, "If you're really unhappy here, I'll just let you out of the contract, and I'll waive the notice requirements. Just let me know if you find somewhere else to live as soon as possible, though, okay?" I only had one ever take me up on it.