Question 1

What is key money in real estate?

Accepted Answer

Key money is a payment made by a prospective tenant to a landlord (or outgoing tenant) to secure a lease or obtain access to a desirable commercial space. Key money is separate from the security deposit and first month’s rent; it is essentially a premium paid for the opportunity to lease the space. In commercial real estate, key money is common in: high-demand retail locations (where the location’s foot traffic and visibility justify the premium), restaurant spaces (where the existing buildout, kitchen equipment, or liquor license adds value), and office spaces in premium buildings with limited availability. Key money may also refer to payments made by a new tenant to a departing tenant for the right to assume the lease and take over the space.

Question 2

Is key money legal in Florida?

Accepted Answer

For commercial leases: key money is generally legal in Florida. There is no statute prohibiting landlords from charging key money for commercial spaces, and the payment is negotiable between sophisticated parties. The key money should be documented in the lease agreement, specifying: the amount, whether it is refundable or non-refundable, whether it is credited against future rent, and any conditions attached to the payment. For residential leases: Florida law is more restrictive. Section 83.49 governs security deposits, and landlords cannot circumvent deposit limitations by calling a payment "key money." Residential tenants should be cautious about any upfront payments beyond the security deposit and first/last month’s rent.

Question 3

How is key money treated for tax purposes?

Accepted Answer

Tax treatment depends on the parties: for the tenant paying key money, the payment is generally deductible as a business expense if it is for a commercial lease (amortized over the lease term under IRC Section 178). For the landlord receiving key money, the payment is taxable income in the year received (or amortized over the lease term if the landlord reports on an accrual basis). If key money is paid to an outgoing tenant for the assignment of a lease, the outgoing tenant must report the payment as income, and the incoming tenant may deduct or amortize the cost. The parties should consult with a tax advisor to determine the optimal treatment.

Key Money

Key Money in Real Estate Transactions

What It Is

Legality in Florida

Tax Treatment

Related Terms

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