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Many unique situations can arise when managing property and doing real estate accounting. Deferred rent is one of them. Fortunately, it’s an easy accounting concept to understand.
In this guide, we’ll define what rental deferment is. Next, we’ll explain how it works in further detail. Finally, we’ll go over examples of rental deferral and define similar terms.
This post covers:
What is deferred rent?
Deferred rent occurs when a resident gets free rent for a set period. The amount of money that isn’t paid during this free period is what’s considered ‘deferred.’
When calculating a property’s total earnings, you must make note of what has been deferred for expense and budgeting purposes.
How does deferred rent work?
Deferred rent is referred to under the current Accounting Standards Codification (ASC) as ASC 842 and ASC 840. The ASC defines rental deferral as what happens when the amount expensed is larger than the amount paid.
When accounting in real estate, the total charge for a lease period is recorded as an expense, even if a resident has not paid rent for one or more months.
For example: Say a resident signs a year-long lease at $1,300 a month (the national average), but has the first two months free. They pay a total of $13,000 in rent, but they’re still filed as having been charged $15,600 for the year. So, the rental deferral amount is $2,600.
What is an example of deferred rent?
A common example of deferred rent occurs when disruptive construction is going on at a building. A resident’s unit might still be livable, but their quality of life is disturbed. To make up for this, many landlords may offer free months of rent for the duration of the construction. This free rent is then deferred when accounting.
Other scenarios involving rental deferral can occur if a resident signs a long-term contract, such as a two-year or five-year lease. Landlords will often throw in a free first or last month of rent under these terms as a way to appeal to prospective residents.
Ultimately, a landlord can offer a free month of rent for any reason they want. But smart and effective accounting will always keep track of what the resident would have been charged.
Learn three essential tools to determine how much to charge for rent:
What does deferred revenue mean?
Deferred revenue is when residents pay for rent in advance. It’s pretty much the opposite of deferring rent. If a resident signs a lease that states they will be charged for the first two months and last month of rent, then the money they pay upfront is called deferred revenue.
Is deferred rent expense an asset?
Deferred expenses can be considered an asset, as they contribute to assessing the total value of your property. However, if your rental deferrals weren’t accounted for, the value of your property could decrease because it would be implied that you charged less for rent, and therefore your property was less profitable.
Is deferred rent a liability?
Deferring rent is considered a liability for you, the lessor. A liability in real estate accounting terms is defined as when a person owes debts or obligations.
If the word liability sounds intimidating, it really shouldn’t be. Rental deferment is a necessary and common aspect of successfully managing the residents at a multifamily property.
Is deferred rent the same as accrued rent?
No, deferred rent is not the same as accrued rent.
Accrued rent is when a resident owes rent. Rent is accrued between the time a resident owes rent and when they pay it. This can be a matter of hours before a payment goes through or a week, depending on how a property’s payment system works.
Accrued rent doesn’t have much in common with rental deferment, except for it also being defined under ASC 840.
Takeaways
- Rental deferral concerns the process of accounting for a resident’s periodically free or reduced rent.
- Residents can gain a free month of rent at a landlord’s discretion, but usually, it comes as a reward or a consolation.
- Most often, rental deferral happens when a landlord offers a free month of rent at the beginning of a lease or when adjusting the rent to make up for disruptive construction.
