Cash-basis landlords: no income, no deduction during free periods
Most individual landlords use the cash method of accounting — income is reported when received and expenses are deducted when paid. Under this method, a free rent concession is elegantly simple: if you collect nothing during the free month, you report nothing. There is no deemed income, no deduction for the forgiven rent, and no special election required.
Example: you offer a tenant one free month in a 12-month lease. You collect 11 months of rent. On your Schedule E, you report 11 months of rental income. The free month creates no deduction and no income — it simply doesn't exist for tax purposes.
Accrual-basis landlords and GAAP treatment
Landlords using the accrual method (required for larger corporations; optional for most individuals) recognize income as it is earned, not as it is received. Under GAAP accounting principles, free rent periods require straight-line recognition of total rent over the entire lease term — meaning even the 'free' months show income because the total economic value is recognized evenly.
For federal income tax purposes, however, accrual-basis individuals can generally follow the tax rules under Section 467 for rental agreements with significant deferred or prepaid rent, which may produce a different result than GAAP. If you are an accrual-basis landlord with complex lease structures, coordinate your accountant's GAAP income statement with your tax return carefully.
Cash concessions, TI allowances, and landlord-paid improvements
A cash payment to a tenant as a lease incentive (sometimes called a tenant improvement allowance or move-in bonus) is generally deductible as a period expense when paid — it is not income to you, it is a cost of securing the lease.
A tenant improvement (TI) allowance paid to a commercial tenant is more nuanced: if you retain ownership of the improvements, you capitalize them and depreciate over the improvement's useful life. If the tenant owns the improvements, the allowance may be a deductible period expense, but this depends on the specific lease terms and IRS guidance on which party is treated as the owner for tax purposes.
Bottom line for most residential landlords: free months are ignored under the cash method; cash move-in incentives are deductible when paid.
Frequently asked questions
Do I report income for free rent months I offer to a new tenant?
Under the cash method (used by most individual landlords), no. You report rent only when received. A free month generates no income and no deduction.
Is a cash concession paid to attract a tenant deductible?
Generally yes — a cash incentive to sign is an ordinary and necessary expense of securing rental income, deductible when paid.
Does the accrual method require me to report income for free months?
For financial accounting (GAAP), yes — straight-line recognition applies. For tax purposes, most individual landlords use the cash method and do not report free-period income.
Sources
Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.