Is a lease break fee income to the landlord, and how do you record it?
Yes. If your tenant pays you to cancel a lease, the IRS says the amount is rent, and you include it in rental income in the year you receive it, whatever accounting method you use. Book it to rental income, not to a deposit and not to a reduction of expenses, and record it in the month the money arrives.
The rule in one paragraph
IRS Publication 527 says that if your tenant pays you to cancel a lease, the amount you receive is rent, and you include the payment in your rental income in the year you receive it, regardless of your method of accounting. That matches the rule for advance rent, which is also taxed in the year received. A cash-basis landlord and an accrual-basis landlord report it the same way.
A lease break fee is different from a security deposit. A deposit is money you hold. A break fee is money you keep. Mixing them up is the common mistake, and it either understates income or leaves a liability on the books that does not exist.
How to record a lease break fee
- Confirm what the tenant is paying for. The lease or a short signed agreement should say the payment is to end the lease early.
- Open an income account named Lease termination income, so you can see it apart from regular rent.
- When the money arrives, debit your bank account and credit Lease termination income.
- Date it the day you receive it. If it arrives in December for a January move-out, it belongs to December.
- Keep the signed agreement with the tenant's file.
Example a made-up tenant with a lease through July wants out in March. The lease says the fee is two months of rent, $1,800 each, so the tenant pays $3,600. Debit Checking $3,600, credit Lease termination income $3,600.
When the fee comes with unpaid rent or a kept deposit
Often a move-out has several pieces at once. Keep each piece on its own line so every amount ends up in the right place.
| Piece | What it is | How to book it |
|---|---|---|
| Last month of rent actually owed | Regular rent | Rent income for that month |
| Lease break fee paid by the tenant | Rent, per Publication 527 | Lease termination income, year received |
| Part of the deposit you keep because the tenant broke the lease terms | Income when you keep it | Move it from the deposit liability to income |
| Part of the deposit you refund | Not income | Leave it as a liability until paid back |
On the deposit, Publication 527 says not to include a security deposit in income when you get it if you plan to return it, but if you keep part or all of it during any year because the tenant did not live up to the lease, you include the amount you keep in income that year. Deposit deductions at move-out has the entries. Some states limit what you may keep from a deposit or charge as a break fee, so check your state and your lease.
Example the same made-up tenant paid a $1,800 deposit. The landlord keeps $300 for damage and returns $1,500. The tenant also paid the $3,600 break fee. Income from the move-out is $3,600 plus $300, which is $3,900. The $1,500 refund is not income.
Other payments tenants make to you
Publication 527 lists several common kinds of rental income. A few are easy to miss in the books:
- Advance rent: any amount received before the period it covers is income in the year received. Advance rent and the tax year covers it.
- Expenses paid by the tenant: if the tenant pays one of your bills, the payment is rental income, and you can deduct the expense if it is a deductible rental expense. When a tenant does repairs instead of paying rent shows the entries.
- Property or services instead of rent: include the fair market value as rental income.
For fees that the publication does not name, such as an application fee or a late fee, the safest habit is to record them as income when received in their own account, then ask your preparer how to report each one.
If you let the tenant out and no money changes hands
Releasing a tenant from a lease for free creates no income and no entry. Just record that the lease ended, stop billing rent from the end date, and begin the move-out steps. If the unit sits empty afterward, rent you did not collect is not an expense and nothing is booked for it. See the vacant unit rules for which costs you can still deduct.
How DoorKeeping handles it
In DoorKeeping the ledger for each property has income accounts you can name for a break fee. A payment arrives in your own bank account, where the bank feed picks it up and matches it to the tenant. Ask Claude or ChatGPT to book it as lease termination income and handle the deposit split, then approve it with one tap. DoorKeeping gives no tax or legal advice. State rules on break fees and deposits vary.
Sources
- IRS, Publication 527, Residential Rental Property (2025), read Oct 30, 2026
Questions
- Is a lease cancellation fee taxable to the landlord?
- Yes. Publication 527 says a payment from the tenant to cancel a lease is rent, included in income in the year you receive it.
- Does the accounting method change when I report a lease break fee?
- No. The IRS says to include it in the year you receive it regardless of your method of accounting.
- Is a kept security deposit income?
- Yes, in the year you keep it because the tenant did not live up to the lease. The part you return is never income.