Cash vs. Accrual Accounting for Landlords: Which Method Saves You More Money?

By PropsManager Team · Rent & Finance · Nov 08, 2024

I'll never forget the year I owed $4,200 in unexpected taxes because I was using the wrong accounting method for my rental properties. I had eight units at the time, tenants were paying late left and right, and my accountant looked at me like I'd been doing my books on a napkin. Which, honestly, wasn't far from the truth.

Here's the thing — choosing between cash and accrual accounting isn't just some boring bookkeeping decision you make once and forget. It directly impacts how much you pay in taxes, how you track profitability, and whether you actually understand the financial health of your rental business. Get it wrong, and you're either overpaying Uncle Sam or flying blind on cash flow.

Let's break down exactly what each method means, when each one makes sense, and how to pick the right one for your portfolio size.

What Is Cash Basis Accounting?

Cash basis accounting is exactly what it sounds like: you record income when the cash hits your bank account and expenses when the money leaves. That's it. No fancy timing rules, no matching revenue to the period it was earned. Money in, money out.

Say your tenant's rent of $1,500 is due on March 1st, but they don't pay until March 12th. Under cash basis, you record that $1,500 as income on March 12th — the day you actually received it. Same deal with expenses. You get a $600 plumbing bill on March 3rd but don't pay it until March 20th? The expense hits your books on March 20th.

Why Most Small Landlords Use Cash Basis

About 70% of independent landlords with fewer than 10 units use cash basis accounting, and there's a good reason for that. It's simple. You don't need an accounting degree. You look at your bank statement and your books match reality.

Cash basis gives you these advantages:

• Dead-simple tracking. Your bank account tells the story. If money came in, it's income. If money went out, it's an expense.
• Better short-term cash flow visibility. You always know exactly how much actual cash you have available right now.
• Lower bookkeeping costs. You can realistically manage this yourself with basic software or even a spreadsheet, though I wouldn't recommend spreadsheets once you're past three or four units.
• Tax timing flexibility. You can strategically time certain payments to shift income or expenses between tax years.

That last point is a big deal. A landlord in Arizona I know deliberately delayed depositing December rent checks until January 2nd, pushing about $9,000 in rental income into the next tax year when she expected a lower tax bracket. Perfectly legal under cash basis. You can't pull that move with accrual.

The Downsides of Cash Basis

But cash basis has real blind spots. If you've got a tenant who's two months behind on rent — that's $3,000 you're owed that doesn't show up anywhere in your financials. Your books say everything's fine while you're actually hemorrhaging money on that unit.

I once had a fourplex where three tenants paid on time and one was chronically 30-45 days late. Under cash basis, my monthly income looked wildly inconsistent even though the underlying revenue was stable. It made budgeting for repairs nearly impossible because I never knew which month's numbers to trust.

Cash basis also creates problems at tax time if you've prepaid expenses. Let's say you pay your property insurance premium of $2,400 in full in November for the following year's coverage. Under cash basis, that entire $2,400 hits as an expense in November — even though the coverage runs January through December. That can artificially inflate your expenses in one year and leave you with no insurance deduction the next.

What Is Accrual Basis Accounting?

Accrual accounting records income when it's earned and expenses when they're incurred, regardless of when cash changes hands. The timing of the actual payment is irrelevant to when it shows up on your books.

Using that same example: tenant owes $1,500 on March 1st. Under accrual, you record $1,500 in income on March 1st — even if the tenant hasn't paid yet. That unpaid amount sits in your "accounts receivable" until the money arrives. The plumber's $600 bill? It's an expense the day you receive the invoice, not the day you write the check.

When Accrual Makes Sense for Landlords

Accrual accounting gives you a fundamentally different — and often more accurate — picture of your rental business. Here's when it starts making real sense:

• You own 10+ units. At this scale, the timing differences between cash and accrual start to meaningfully distort your financials.
• You have tenants who consistently pay late. Accrual captures the revenue you've earned regardless of collection timing.
• You're seeking financing. Banks and lenders strongly prefer accrual-based financials because they show a more complete picture.
• You have significant prepaid expenses or deferred income. Security deposits, prepaid insurance, and annual maintenance contracts all get handled more accurately.
• Your gross receipts exceed $29 million. At this point, the IRS actually requires accrual (though if you're at this level, you've got a CFO handling this already).

The Real Cost of Accrual Accounting

Look, I won't sugarcoat it — accrual accounting is more work. You'll need to track accounts receivable (money tenants owe you) and accounts payable (bills you owe but haven't paid). You'll need to make adjusting entries at the end of each period. And you'll almost certainly need either a bookkeeper or solid property management software to keep everything straight.

A professional bookkeeper familiar with real estate will typically charge $200-$500 per month depending on your portfolio size. That's $2,400-$6,000 a year. Worth it if you've got 20 units generating $300,000 in annual rent. Probably overkill if you've got a duplex bringing in $2,800 a month.

Cash vs. Accrual Accounting: Side-by-Side Comparison

Here's a clear breakdown of how the two methods stack up across the factors that matter most to landlords:

How Each Method Impacts Your Taxes

This is where the rubber meets the road. Your accounting method directly determines when you pay taxes on rental income, and timing is everything.

Cash Basis Tax Scenario

Let's walk through a real example. You own a rental collecting $2,000/month. In December, your tenant pays both December and January rent early — that's $4,000 hitting your account in December. Under cash basis, you report $4,000 in December income. Your total annual rental income jumps by an extra $2,000 for that tax year.

If you're in the 24% tax bracket, that early payment just cost you $480 in accelerated taxes. Not the end of the world, but it adds up across multiple units and multiple years.

On the flip side, cash basis lets you accelerate deductions. Need to reduce your taxable income this year? Pay your January mortgage in late December. Buy supplies in December instead of January. Pay your property manager's Q1 invoice early. Every dollar you push into the current year reduces your current tax bill.

Accrual Basis Tax Scenario

Under accrual, that double December payment doesn't change anything. You'd already recorded January's $2,000 as income when it was due on January 1st, and December's $2,000 when it was due on December 1st. Each month gets exactly one month of income — clean and predictable.

But here's where accrual can actually hurt: if a tenant stops paying and you're on accrual, you've already recorded that income. You're potentially paying taxes on money you haven't collected and might never collect. You'd need to write off the bad debt later, but there's a timing gap that can sting.

A landlord in Texas told me he switched from accrual back to cash after a tenant skipped out owing $5,400 in back rent. He'd already reported and paid taxes on that "income." Getting the deduction for the bad debt required filing an amended return, and his accountant charged him $800 for the hassle.

The Section 446 Rule

Here's something a lot of landlords don't know: if you want to switch accounting methods, you need IRS approval. You file Form 3115 (Application for Change in Accounting Method). It's not a casual decision — the IRS wants to make sure you're not gaming the system by switching methods to dodge taxes. The process typically takes one filing season, and you may need to make a "Section 481(a) adjustment" to account for items that would otherwise be duplicated or omitted during the transition.

Trust me on this one — talk to your CPA before switching. I've seen landlords try to switch methods mid-year without filing the paperwork and it created an absolute mess at audit time.

Choosing the Right Method: A Decision Checklist

Still not sure which method fits your situation? Run through this checklist:

Choose Cash Basis If:

• You own fewer than 10 rental units
• Your tenants mostly pay on time
• You do your own bookkeeping or use basic software
• You want maximum simplicity at tax time
• You value real-time cash flow visibility
• You're not seeking large commercial loans
• You want flexibility to time income and deductions strategically

Choose Accrual Basis If:

• You own 10+ rental units or a commercial property portfolio
• You have chronic late-paying tenants and need accurate receivables tracking
• You're applying for bank financing and need GAAP-compliant financials
• You have a bookkeeper or property management team
• You want the most accurate picture of true profitability across periods
• You manage properties with complex lease structures (CAM charges, percentage rent, etc.)
• Your accountant specifically recommends it based on your tax situation

Hybrid Approaches That Actually Work

Here's something most blog posts won't tell you: plenty of successful landlords use a modified approach that borrows from both methods.

The most common hybrid is cash basis for taxes, accrual tracking for management. You file your tax return on a cash basis (simpler, more flexible), but you maintain an internal accrual-style report that shows you what's owed, what's overdue, and what your true revenue picture looks like.

This is actually what PropsManager's financial tracking tools are built for. The system automatically tracks when rent is due versus when it's received, gives you an aging receivables report so you can see who's behind, and still lets you generate cash-basis reports for tax prep. You get the management insight of accrual without the tax complexity.

Another approach: some landlords use accrual for their operating books but make cash-basis adjustments at year-end for their tax return. Your CPA handles the conversion, which typically costs $300-$500 per filing but can save significant tax dollars by giving you cash-basis timing advantages.

Common Accounting Mistakes Landlords Make

After managing properties for years and talking to hundreds of other landlords, these are the bookkeeping errors I see over and over:

1. Mixing Methods Without Realizing It

This is the number one mistake. You record rent when you receive it (cash basis) but then deduct the plumber's invoice before you've paid it (accrual basis). The IRS requires consistency. Pick one and stick with it across the board.

2. Ignoring Security Deposits

Security deposits are not income — not on cash basis, not on accrual. They're a liability. You owe that money back unless you have legitimate deductions. I've seen landlords report security deposits as income, pay taxes on them, and then face a headache when they return the deposit. Don't do this.

3. Failing to Track Separate Properties Individually

Even on cash basis, you should be tracking income and expenses for each property separately. The IRS requires a separate Schedule E for each property. Throwing everything into one bucket is a recipe for audit problems. This is another area where dedicated property management software saves serious time compared to spreadsheets.

4. Not Accounting for Depreciation

Depreciation isn't tied to cash flow — it's a non-cash expense you claim regardless of which accounting method you use. On a $200,000 residential rental (excluding land value), you're looking at roughly $7,273 per year in depreciation deductions over 27.5 years. That's free money off your tax bill that too many landlords leave on the table.

5. Forgetting About the 14-Day Rule

If you rent your property for fewer than 15 days per year, you don't have to report any of that rental income — regardless of your accounting method. This is the so-called "Masters exception" (named after Augusta homeowners who rent during the golf tournament). It's edge-case stuff, but worth knowing.

How PropsManager Simplifies Rental Accounting

Whether you choose cash or accrual, having the right tools makes all the difference. Manually tracking rent payments, late fees, maintenance expenses, and tax deductions across multiple properties in spreadsheets... it breaks down fast. I've been there.

PropsManager was built specifically for landlords who want clear financial visibility without needing an accounting degree. The platform handles:

• Automatic income tracking — every rent payment is logged with the date received and the date it was due, supporting both cash and accrual reporting needs.
• Expense categorization — maintenance, insurance, taxes, and management fees are automatically sorted into IRS-compatible categories for Schedule E.
• Aging receivables reports — see exactly which tenants owe what, how late they are, and what your total outstanding balance looks like.
• Per-property P&L statements — individual profit and loss reporting for each unit, ready for your CPA at tax time.
• Automated rent collection — fewer late payments means less accounting complexity regardless of which method you use.

You can explore all our financial tracking capabilities on the features page or check out pricing plans that scale with your portfolio. If you want a personalized walkthrough of how PropsManager handles accounting for your specific situation, schedule a demo.

When to Consult a CPA

DIY accounting works fine when you've got a couple of units and straightforward leases. But there are inflection points where professional help pays for itself many times over:

• You cross 10 units. The complexity jump is real. A good real estate CPA costs $500-$1,500 for an annual return and will typically save you more than their fee in optimized deductions.
• You're considering a 1031 exchange. The accounting implications are significant and method-dependent.
• You have mixed-use properties. If a building has both residential and commercial tenants, the accounting rules diverge in important ways.
• You've received an IRS notice. Don't try to handle this yourself. Ever.
• You're forming an LLC or partnership. Entity structure interacts with your accounting method in ways that affect both taxes and liability. Your CPA and attorney need to coordinate.

Most CPAs who specialize in real estate offer a free initial consultation. Take advantage of that. One 30-minute conversation can save you thousands in avoided mistakes. If you're also looking for guidance on managing your properties remotely, getting your accounting method right is the foundation everything else builds on.

Explore More PropsManager Resources

Looking for the right property management software? Check out our in-depth guides:

• Compare Property Management Software — See how PropsManager stacks up against Buildium, AppFolio, Rent Manager, and Propertyware.
• Software for Small Landlords — Built for landlords managing 1–50 units without the enterprise price tag.
• AI-Powered Property Management — Discover how automation can save you 5–10 hours per week.
• Solutions for Property Managers — Scale from 50 to 500+ units without scaling your costs.

Frequently Asked Questions

Can I switch from cash to accrual accounting (or vice versa)?

Yes, but it requires IRS approval. You'll need to file Form 3115 (Application for Change in Accounting Method) with your tax return for the year you want the change to take effect. There may also be a Section 481(a) adjustment required to prevent income from being counted twice or skipped entirely during the transition. Plan on involving your CPA — this isn't a DIY form.

Do I have to use the same accounting method for all my rental properties?

Generally, yes. The IRS expects consistency within your rental activity. You can't use cash basis for properties that are profitable and accrual for ones that are losing money — that's the kind of cherry-picking that triggers audits. However, if you have genuinely separate business activities (say, residential rentals in one LLC and a commercial property in another), each entity can potentially use a different method.

Is accrual accounting required for LLCs or S-Corps that own rental property?

Not automatically. LLCs and S-Corps with average annual gross receipts under $29 million can use either cash or accrual. The entity type doesn't dictate the accounting method — your gross receipts and business structure do. That said, if your LLC has multiple members and complex profit-sharing arrangements, accrual may give a clearer picture for partner reporting.

How does my accounting method affect depreciation?

It doesn't. Depreciation is a non-cash deduction calculated the same way regardless of whether you're on cash or accrual basis. For residential rental property, you depreciate the building (not land) value over 27.5 years using the straight-line method. A $275,000 building generates $10,000 per year in depreciation deductions under either accounting method.

What's the easiest way to track rental finances if I'm just starting out?

Start with cash basis — it's simpler and matches your bank activity. Use a dedicated tool like PropsManager rather than generic spreadsheets. Even with just one or two units, building good habits early saves enormous headaches later. Track every expense, keep receipts digitally, and reconcile monthly. When your portfolio grows to the point where cash basis feels limiting, you'll have clean historical data that makes switching to accrual much smoother.

Stop Guessing, Start Managing Your Rental Finances Right

Your accounting method isn't something to pick randomly or copy from a friend. It's a strategic decision that affects your tax bill every single year. Cash basis works beautifully for most independent landlords — it's simple, flexible, and keeps you grounded in actual cash flow. Accrual gives you a sharper financial picture when your portfolio reaches the scale where timing differences really matter.

Whichever path you choose, consistency and good tools are what separate the landlords who build wealth from the ones who just survive tax season. PropsManager gives you the financial infrastructure to manage either method with confidence — automated tracking, per-property reporting, and tax-ready exports that make your CPA's life easier.

Get started with PropsManager today and take control of your rental property accounting. Or request a demo to see exactly how the platform can simplify your financial management.