Question about Treating the Credit in a Lease-to-Own Agreement

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Question about Treating the Credit in a Lease-to-Own Agreement

Ali Mol
Member since 2023 · 5 posts · 0 votes

We signed a lease-to-own contract for 60 months. At the end of the term, we are obligated to provide a $100,000 credit at closing toward the purchase price for the buyer/tenant. This credit amounts to $1,666 per month, with the monthly rent set at $3,300.

From an accounting perspective, should the $1,666 per month be treated as a liability (deferred credit) and excluded from income, or should it be recognized as income and then applied as a credit at closing?

This property is owned by a multi-member LLC.

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  • Ashish AcharyaBusiness Member
    CPA, CFP®, PFS · Sarasota, FL · Member since 2017 · 5k+ posts · 3k+ votes
    1y

    @Ali Mol In a lease-to-own agreement, the $1,666 monthly credit should be treated as a liability (deferred credit) rather than rental income, as it is allocated toward the purchase price. The remaining rent ($1,634) is recognized as rental income. At closing, the accumulated credit is applied to reduce the purchase price, eliminating the liability. This treatment ensures accurate financial and tax reporting, as the credit is part of the sale transaction rather than income.

    This post does not create a CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.

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