Originally posted by Jonathan VanHorn:
Marc is correct, if you are selling the home on terms, you have to recognize the capital gain in the year of the sale.
I'm not familiar with Lease-Options, but I'm pretty sure you can treat that as rent income, until the property is sold that is. That would have added benefits such as depreciation and upkeep deductions.
Hi, this is another good reason to do a lease-option with two contracts.
The option price is taxed, under cash basis accounting, as income is earned, generally as it is paid at the time of the option. If the Option price is financed, the income is recognized as it is earned, not as it is received. The lease is treated as rental income.
If the lease credits the option price or if the option price is financed, generally you may have an installment contract. There are tests to be met for the buyer. If they take on aspects of ownership, for example if the buyer is responsible for insurance, maintenance or taxes, it can be a sale. if it walks like a duck and quaks like a duck, it's a duck! If it looks like a sale, provides rights and/or liabilities of ownership, it's a sale!
A value of the lease with an option may be taken into consideration, as well. If therre is a down payment and lease credits that amount to a significant amount of the market value over a term and there is a small residual amount at the end, it may be viewed as a sale
I hope no one does a lease with credits toward a purchase. Especially with Section 8 tenants! Inquire with a CPA as suggested! IMO, Bill