Deferred Taxes On Option Consideration
Does the woding of an L/O agreement have to do with when taxes become due on the option consideration?
Does it depend on whether or not any part of it can be counted as principle reduction or down payment upon execution?
I'm picturing 2 scenereos: In the first, it is a pure payment for the right to the option. In the second, it counts toward the down payment later. What are the tax implications in both cases if the tb does not exercise the option, or is evicted, etc. (assuming the option contract is then cancelled)
How your lease option agreement is worded is a topic better addressed in the legal forum.
In general, option consideration is not recognized as income until either the option is exercised or the option expires.
When the option is exercised, option consideration received is included as part of the proceeds of the sale and taxed as part of your profit. No matter whether the option consideration is applied to a reduction in the purchase price or treated as a down payment. The tax effect is the same.
When the option expires (assuming the option consideration is forfeited), option consideration received is treated as a short term capital gain and taxed accordingly.
Well, I can't help but love the sound of that! Thanks as always, Dave.