Cash vs accrual accounting for rental property
Under the cash method you count rent when you receive it and expenses when you pay them. Under the accrual method you count rent when it is earned and expenses when they are incurred, whether or not money has moved. Individual landlords generally can use the cash method for taxes, and the IRS has one rule that applies either way: advance rent is income in the year you receive it.
The two methods, in the IRS's words
Publication 538, Accounting Periods and Methods says that under the cash method you generally report income in the tax year you receive it and deduct expenses in the tax year you pay them. Under the accrual method you generally report income in the tax year you earn it and deduct expenses in the tax year you incur them, regardless of when payment is made.
| Event | Cash method | Accrual method |
|---|---|---|
| Rent for December, paid January 3 | January income | December income |
| Plumber's December bill, paid January 10 | January expense | December expense |
| Insurance paid in December for next year | Generally deductible when paid if the coverage ends within 12 months (the 12-month rule) | Expensed over the months covered in your books; ask your preparer about tax timing |
| Rent for January, paid December 28 | December income | December income (advance rent rule) |
Received means available to you
Under the cash method, income counts when you actually or constructively receive it. Publication 538 says income is constructively received when it is credited to your account or made available to you without restriction, and that income an agent receives for you counts as received by you. So rent that lands in your bank on December 31 is December income even if you do not look until January, and rent your property manager collects in December is December income to you.
The advance rent rule overrides both
Publication 527 says to include advance rent in your rental income in the year you receive it, regardless of the period covered or the accounting method you use. Its own example: a tenant pays $9,600 for the first year and $9,600 for the last year of a lease in 2025, and the owner includes all $19,200 in 2025 income.
Example a made-up 10 unit building's tenants pay $3,900 of January rent before December 31. Under either method, that $3,900 is income in the year it was received, December's year. The accrual books may also show it as prepaid rent on the balance sheet for management purposes, but the tax return follows the advance rent rule.
Same year, two answers
Example a made-up 16 unit building charges $259,200 of rent for the year. By December 31 it has received $252,000 of it, plus $2,600 of January rent paid early. It owes a $3,800 December repair bill it pays on January 8, and it paid $64,000 of other expenses during the year. Cash method: income is $252,000 plus $2,600, or $254,600; expenses are $64,000; net is $190,600. Accrual method, with the advance rent rule: income is $259,200 earned plus $2,600 received in advance, or $261,800; expenses are $64,000 plus $3,800, or $67,800; net is $194,000. The $3,400 difference is the $7,200 of rent earned but unpaid, minus the $3,800 bill incurred but unpaid.
Over the life of the building the totals come out the same. What changes is the year each dollar lands in, and how well the books show what is owed both ways at any moment.
Which method to use
| Cash method | Accrual method | |
|---|---|---|
| Matches the bank account | Closely | Needs receivables and payables to reconcile |
| Shows unpaid rent and unpaid bills | Only with a separate rent roll and bill list | In the balance sheet |
| Work to keep | Less | More |
| Who generally can use it for taxes | Individuals; corporations and partnerships only if they meet the gross receipts test | Anyone |
Publication 538 says corporations and partnerships generally cannot use the cash method unless they meet a gross receipts test, which it describes as average annual gross receipts of $26 million or less for the three prior tax years, indexed for inflation. A multi-member LLC taxed as a partnership is a partnership for this purpose. Publication 538 also says that if you later want to change your accounting method you must generally get IRS approval, and that the change is requested on Form 3115.
A common setup is to file on the cash method and keep a rent roll and a list of open bills alongside it, which gives most of the accrual view without the accrual work. Pick your method with your tax preparer before your first return for the property.
How DoorKeeping handles it
DoorKeeping keeps each property's ledger and bank account separate and shows what each tenant has been charged and has paid, so you can see both money received and money owed for every building. Expense accounts map to Schedule E lines, and you can ask your AI app for any property's P&L for any period. Your tax preparer chooses the method on your return; DoorKeeping gives no tax advice.
Sources
- IRS, Publication 538, Accounting Periods and Methods, read Oct 29, 2026
- IRS, Publication 527, Residential Rental Property (2025), read Oct 29, 2026
Questions
- Do most landlords use cash or accrual accounting?
- Individual landlords generally can use the cash method, which counts rent when received and expenses when paid. Ask your tax preparer which suits your situation.
- Is rent paid in December for January taxed in December?
- Yes. The IRS says advance rent is income in the year you receive it, whatever accounting method you use.
- Can I switch from cash to accrual later?
- Generally only with IRS approval. Publication 538 says the change is requested on Form 3115, so plan the choice with your tax preparer.