The cash method: how most landlords operate
Under the cash method of accounting, you report income when you receive it and deduct expenses when you pay them. For a rental property:
Rent received in January for the January lease payment → reported in January.
Repair bill paid in December → deducted in December.
Security deposit received → not income (you expect to return it).
The cash method is available to individuals regardless of gross rental income. It is simple, matches your cash flow, and allows you to accelerate deductions by prepaying expenses in December (subject to the 12-month prepayment rule: prepaid expenses covering no more than 12 months ahead are currently deductible).
Constructive receipt: the timing trap
The cash method doesn't let you defer income simply by refusing to deposit a check. Constructive receipt means income is taxable when it is made unqualifiedly available to you — even if you don't physically collect it.
If a tenant pays December rent on December 28 but you don't deposit the check until January, the income is constructively received in December and belongs on that year's return. You cannot shift income to next year by delaying deposit.
Practically: collect rent when it's due; don't hold uncashed checks at year-end to defer income. The IRS consistently wins constructive receipt cases involving year-end income deferral.
When the accrual method might apply or be elected
Individuals who hold rental properties through C corporations face accrual requirements if gross receipts exceed certain thresholds. Most individual landlords and pass-through entities (LLCs, S corps) can use the cash method.
A landlord might voluntarily choose the accrual method if they have complex lease arrangements — prepaid rent, percentage-rent clauses, or CAM reconciliations in commercial leases — where the accrual method better matches economic reality. Changing accounting methods requires IRS consent (Form 3115) and may trigger a Section 481(a) adjustment.
For the vast majority of individual rental investors, the cash method is correct, simpler, and available with no special election.
Frequently asked questions
Do I have to use the accrual method for my rental properties?
Almost certainly not, if you own properties as an individual or through a pass-through entity. The cash method is available to most rental property owners regardless of gross income.
What is constructive receipt and why does it matter?
Constructive receipt means you must report income when it is available to you, even if you don't collect it. Holding an uncashed rent check at year-end doesn't defer the income to the next year.
Can I prepay expenses in December to get a current-year deduction?
Yes, under the cash method, you can prepay expenses covering up to 12 months ahead and deduct them currently. Prepayments covering more than 12 months ahead must be amortized over the applicable period.
Sources
Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.