Option Fee - Tax Accounting (Expense or Depreciate)

2 Replies

Hi Everyone - 

My question is in regards to tax returns.  I'm interested to better understand if an option fee, for a property you successfully close on, is an expense, or somehow added to your basis and depreciated.  If it is depreciated, what is the schedule?

Is there a limit to your ability to shift more money towards an option fee to reduce the price beyond what is reasonable in a given market?  For example, the property is worth $200,000 could I have an option fee of $100,000 and a purchase price of a $100,000?  If so, what would the implications be?

Thanks in advance for all the help.  At this point, the question is theoretical.  If it is something that I do, I'll of course consult my CPA for confirmation of any information provided.

Thanks,

Paul

@Paul Haviland

Simply stated, the option to buy fee is added to the basis of the property and is depreciated with the property once you acquire it ( same life as the related property ). 

There is no point in a high option fee for both buyer or seller. The gains for seller and basis ( cost) for you will not change. 

If you pay high buy option for a property it will eventually be added to the basics after you exercise it, so does not matter. However, if you do not exercise it, you lose all that money. 

@Paul Haviland

I agree with Ashish - The option fee will be added to the basis of the property. Depending on the property type - it would be depreciated over 27.5(residential) or 39 years(non residential).

Basit Siddiqi, CPA

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