What are lease payments in advance and in arrears?

Payment in advance is a payment structure in which lease payment is due and payable at the beginning of each payment period during the lease term, primarily to protect the lessor by decreasing the lessor’s credit exposure.  A first payment comprising more than one advance lease payment is an enhanced first rental, with the resulting “rental holiday” equaling the amount of advance payment in excess of one monthly payment.

Although it has a similar effect to a deposit, a payment in advance is generally fully tax deductible as a rental – unlike a deposit.

Advance Payment
	↓ Advance Payment
Period	1	2	n
Payments	MLP ↓	MLP ↓	MLP ↓

Payment in arrears is a payment structure in which lease payment is due and payable at the end of each payment period during the lease term, after the lease financing is provided in a previous period.  The difference between payment in advance and payment in arrears is the interest charged and paid on the funding for the first payment period.

Payment in Arrears
Period	1	2	n
Payments	MLP ↓	MLP ↓	MLP ↓