Tax consecuence of long term lease/options.
Can someone give me a general answer to the following situation.
Let's say I buy a duplex for $100k and I give you an option to buy it for 20 years.
As option money you give me $20k. I purchase it with a 15 year full amortized loan of $80k. As per the terms of the option, I collect the rents and am responsible for keeping the property in good condition.
The purchase price on the option is $20k plus the balance of the loan at the time of purchase. If you wait 15 years, you will pay $30k and the property is yours free and clear.
In that scenario, I purchased the property for 100k and sold it for a total of $50k.
$20 for the option up front and another $30k of actual purchase price. This being the case, shouldn't I have a loss of $50k that I could write off.
I will have to recapture my depreciation, which I estimate will be a little over $10k if I depreciate 75% using a straightline method over 27.5 years. Recapturing 15 years that I will have written off and paying 25% tax.
The benefits to me is I can buy unlimited properties with 20% down that should cash flow a little immediately and plenty in years 5-15. In addition at the time of sale I will have a loss of $50k and I will collect a cash infusion of $30 at the time of sale.
Benefits to the buyer. You control a property with 20% down, you never have to qualify for the property. The buyer never has to manage the property. The buyer receives all the appreciation and the property is free and clear when he/she purchases the property in 15 years. The option will allow the future buyer to finance the $30k to purchase the property when the property is purchased in the future, so the buyer only needs to pull money out of their pocket at the beginning for the option money.
If appreciation is strong, the optioner can purchase the property at anytime. Therefore, if the property doubles in value in 5 years the price to buy would be the balance of the loan (just to use a figure, let's say $78K) plus $30k for a total of $118k and they can sell it for $200k.
There are more details, but given the above scenario, please give me some feedback on the negatives. I want to know why this won't work. I know areas depreciate and management will be very important. But assume that I am buying correctly in good areas and at good prices.
Thank you.