How to file taxes on a sandwich lease option

5 Replies

Hi Guys, I searched BP for tax prep help, didn't find any tax prep helps for a sandwitch lease option.

Bought on a lease and option.  Zero option fee, lease is the sellers mortgage payment:  $798/mo.  I pay for fix ups.   

In 2014 about $4k in fix ups and did not rent on a lease and option till early 2015.  

Just guessing and figure I'm way off.  I use TurboTax by the way.

- New rental in Rental / Royalty section.  I have 10 other std rentals.

- purchase price = zero

- cost basis is stepped up by the 2014 fix ups pre renting.

- I may have paid one lease payment to the seller.  I don't know where to put this number?

This is all I need to get punched in for 2014.

In 2015 taxes:

- I took a $2.5k option fee.  I heard this is a non-taxable event since it's early sale money, that is handled at the actual sale date.  If no sale guessing it's income but at option expiration.

- I'm getting $925/mo rent but paying $798 to the owners.  Need to handle this?  Out of ignorance and guessing, I'd subtract the two and just file actual rent is the difference...  :)

- Had more fix up expenses in 2015 prior to renting.  I figure I'd add them as depreciated items.  New bathroom and electrical fixtures and painting.  I forget the depreciatoin period for a paint job?


@Brian Gibbons is correct you need a good tax professional, not those franchise brands, someone licensed who specializes in real estate and preferably owns some themselves.  turbo tax is designed for someone who owns maybe one or two conventual rentals and can not handle complex transaction like option contracts, because your asset is actually the contract itself which would normally be reported on schedule D and it sounds like your trying to treat as a rental property on schedule E.  Again I'm just guessing on the limited information you provided but you really need a tax pro.  I promise a good accountant will save you more in taxes than you will pay in fees.  Good luck!

@Cameron Skinner , @Curt Smith ,

I have a different perspective.  In my point of view, I see this the same as a property flipping activity that is reported on Schedule C.  The property was optioned and then the option was "flipped".  

I would report all income and expenses on Schedule C.  As I see it, Curt does not own the property, he is a tenant with an option to purchase.  He has, in turn, leased the property to his subtenant and given that person an option to purchase.  Any money Curt has spent on the property to make it rent ready is accrued until Curt exercises his option at which time the make ready costs are added to his basis.  Whether Curt can take a depreciation expense for improvements made to a property he is renting is a question I leave for someone more knowledgeable to answer.  

The rent Curt pays to the owner is a business expense, and the rent received from his subtenant is business income on Schedule C.

Just how I see it.   

@Dave Toelkes your correct it may be schedule C depending if he is considered a "dealer" in the business of buying and selling option contracts, but the better tax treatment in most case would be for him to be considered an "investor" not a "dealer" if he plans to hold the contract for more than a year and be taxed as capital gains.  Then again he might want to structure himself so he is considered a "dealer" so he can take expenses as current expenses instead of capitalizing them if he is in a low tax bracket.  This is why @Curt Smith really needs a Tax pro to set up his situation for the best tax benefit, because there are way too many variables to every individual's specific tax situation.  


Thanks Guys for commenting!.   I appreciate the tip re hiring "pros".  I'm not taged a dealer.  98% landlord. Took this lease option intending to just be a rental, the tenant asked if they could buy so setup the sell side lease option.

I view no depreciation is possible, my guess.  

Re Sched D:  this is not a stock where there was a sale.  A sandwitch lease option to me seems more like the Sched C, business, fit.  I'll proceed on investigating Sched C.  Thanks here.

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