Real Estate Entities – GAAP or Income Tax Basis?

Larry Davidson

In reporting financial results for real estate companies, Generally Accepted Accounting Principles (GAAP) and the income tax basis of accounting often provided very different financial reporting results.  If the real estate company is not required to provide GAAP financial statements (ie. for a bank, lender, partner, investor, or insurance company), then income tax basis of accounting might serve their needs or requirements.

GAAP vs. Income Tax Basis – Revenue Recognition

The new revenue recognition rules under ASC 606 under GAAP, specifically eliminates rental revenue from the new accounting standard, so it should not have any material effect on rental revenue.  If there are property management fees or other types of fees charged that are material to the overall financial statements, the new revenue recognition standards may apply under GAAP accounting standards.  Under income tax basis of accounting the new revenue recognition and upcoming new lease standards will NOTbe implemented.  This may be a determining factor, as implementing the new GAAP standards, (2019 revenue, and 2021 leases – to be delayed – delay not official as this writing), may or may not provide any value or useful information to the financial statement users.

Revenue Recognition – Rental Revenue

Under GAAP, rental income is generally recognized evenly over the life of the lease (straight-line). Commercial leases commonly include rent credits/abatements or holidays in addition to escalation clauses.  Any rent increases and holidays factored into determining the constant rent throughout the entire life of the lease. For example, if a tenant has a 6-month rent holiday at the beginning of a 10-year lease, (with $50,000 monthly rent), the lease income reported by the landlord in year one under GAAP would be as follows:

  • $50,000 per month multiplied by 114 months (120 months minus 6 months holiday) equals $5,700,000.
  • $5,700,000 divided by 120-months equals $47,500 monthly rent – straight-line.
  • $47,500 monthly rent multiplied by 12 months equals $570,000 year one of GAAP rental revenues.
  • The variance or difference between recognized GAAP revenues of $570,000 and revenue billed and received $300,000 (6 months * $50,000) of $270,000 would be recorded as a deferred rent asset on the balance sheet in year one of the lease.

Under income tax basis of accounting, the revenue recognition is much simpler:  rental income or revenues reporting on the financial statements in year one of the lease would be $300,000 (6 months * $50,000). That is assuming all billed rent was received.  The revenue reporting on the income tax basis agrees with the $300,000 cash flow received in year one of the lease.  Income tax basis records revenue when amounts are received.

There are other differences between the GAAP and income tax basis of financial reporting.  Contact Larry Davidson, CPA at, for assistance in determining which is the appropriate financial reporting model for your real estate operations.


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