Do I include income for prepaid rents collected in 2016 by the property management company that will not be paid to me until 2017?

[greggillespie44]

My tenant paid my property management company rent for the months of January-May of 2017. The property management company explained that they are not legally allowed to distribute the money to me until the corresponding months in 2017. However the 1099 provided by the property management company included all 5 months of prepaid rents for 2016. Given that I have not actually received the rental income during 2016, should I be including it within my 2016 return? It is likely it will be difficult to get a corrected 1099 from the property management company, so is there a way to include the prepaid rents as income on my 2016 return and then expense it out so that it would not be included until 2017?

[PatriciaV]

Yes, you should include prepaid rents received by your agent and reported on Form 1099-MISC.

This income falls under the IRS definition of "constructive receipt," in that the funds are available to you without restriction. You do not need to have physical possession of those funds. For tax purposes, constructive receipt is the same as actual receipt of income. If you authorize someone to be your agent and receive income for you, you are treated as having received it when your agent receives it.

Refer to IRS Pub 538 - Cash Method, Constructive Receipt

[greggillespie44]

The trouble I am having with that definition is the "available without restriction" piece. My property management company has told me the funds cannot be deposited to my account until the month that it is earned and therefore there is a restriction on the access to those funds.

[PatriciaV]

You may wish to consult an attorney to determine your legal right to these funds. However, the IRS rules consider you and your agent to be one, in that whatever funds are held by the agent belong to you.

[joeturbola]

What about the deposit? should that include in the 1099 for tax filing as well?