Reporting Option Payment to IRS on Rent to Own Contract

5 Replies

Hello! We own a property and are renting it to a tenant using a rent to own contract. The tenant gave us $35,000 non-refundable earnest money in exchange for a 5 year window to obtain financing/buy the property from us. I haven't reported the option payment to the IRS yet because I don't know what type of income it is. In other words, at this point it's unclear whether that $35,000 is rent, or proceeds from the sale of a home and I won't know until the option expires.

When I looked at IRS guidelines, I saw guidance on land contracts but that's not the same as rent-to-own.

If you have a real estate tax attorney in WA state that you recommend, please enlighten me! And of course, let me know if you've ever had to report an option payment to the IRS, and how your CPA said to report it.

You don't necessarily need a tax attorney unless you're going to court with the IRS.

A good tax CPA will be able to help you.  Whether it is a bonafide purchase option or disguised sale for federal income tax purposes is dependent on all of the facts and circumstances.

I meant tax CPA not attorney, LOL. I reached out to one in the Seattle area today who specializes in real estate. When the contract was written, we intended the contract to be a bonafide rent to own so hopefully that's what it is! 

@Lauren Sands

CPAs are licensed by state.  However, that does not confine our pool of potential of clients to our home state.  I have clients all over the world, and am able to serve them remotely.

Most CPAs active on this sub-forum are the same in that regard.