I purchased a property for a buyer who has bad credit and was unable to obtain a loan. I am leasing the property to this individual and have an agreement to sell the property to him in five years. I received $60k from this tenant buyer as an option payment. I don't believe this should be considered income on my taxes since it will be applied toward the purchase price in five years. This is essentially a large security deposit and I am acting as the lender. Any thoughts from accountants would be appreciated.
How do I account for receipt of a lease option payment in a real estate transaction?
This is a very complicated (technically) question. Basically, if your arrangement looks more like an sale with a 60,000 down payment and the balance of the payment due in 5 years, it will be treated as a sale in the year of execution of the option contract. You will have to pick up any gain over the time when you receive payments. For example, if you bought the property for 300,000 and optioned it for 500,000, you would pick up 500-300/500 or 40% of each dollar received as gain.
If there is enough flexibility in the option contract for it to not be considered as sale, there will be no tax on the receipt of the payment because it is still considered an open transaction.
Please consult a professional, this question is beyond the scope of this forum.
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Any tax advice included in this written or electronic communication was not intended or written to be used, and it cannot be used by the taxpayer, for the purpose of avoiding any penalties that may be imposed on the taxpayer by any governmental taxing authority or agency.
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