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.
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.
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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