A sublease is the renting of property by a tenant to a third party for a portion of the tenant’s existing lease contract. Even if a tenant subleases a property, the original tenant is still liable for the obligations stated in the lease agreement, such as the payment of rent each month. Rent you receive from your tenant under the sublease is rental income and must be reported. If your tenant pays for expenses that you are obligated to pay pursuant to your lease, then you must treat the tenant's payment as income. You can deduct expenses related to the sublease to offset rental income. Assume Company A signs a 10-year lease with payments of $10,000 annually with $500 escalations each year, paid in advance. At the end of Year 6, Company A decides that it no longer needs the space, and estimates it could sublease it to a third party for the remaining 4 years on the lease at 9,000 annually.