Many landlords require tenants to pay advance rent when signing a lease, with the most common situation being the prepayment of the last month's rent. With that in mind, here's a rundown of what exactly advance rent is, how it differs from a security deposit, and what landlords should keep in mind before requiring advance rent payments from their tenants.
What is advance rent?
As the phrase implies, advance rent refers to rental payments made for the future use of a property. However, this does not include rent that is paid for the month immediately following the payment -- by that definition, virtually all rent would be considered advance rent.
The most common definition of advance rent is any rent that has been prepaid more than 30 days in advance. For example, if you signed a lease in January and prepaid the first three months' rent, the first month would be considered your standard payment of the monthly rent due in January, while February and March would be considered advance rent payments.
Although it's possible for a tenant to pay any agreed-upon amount of rent in advance, the most common use of advance rent in practice is to require tenants to pay first and last months' rent, or two months' rent altogether, when signing a lease. In this case, the last month's rent would be considered advance rent.
How is advance rent different from a security deposit?
One major difference between advance rent and a security deposit is the tax treatment. Advance rent is required to be treated as income in the year it is received. Meanwhile, security deposits aren't included in income reporting at all, unless you end up keeping some or all of it to cover damages.
Speaking of damages, another key difference is how landlords are allowed to use each type of payment. In most states, advance rent can only be used to cover rent. If a tenant prepays their final month's rent, it can't be used to pay for repairing damage to the unit caused by the tenant. On the other hand, security deposits are more flexible. They can be used to pay for damage caused by the tenant or can be applied to unpaid rent.