Lease/Op Tax Questions....
Hello- I am going to Lease/Op my current residence to my Father-in-Law and was wondering what type of tax issues I may run into with doing this. He is paying me $17000 down and then $980 a month rent which is my actual mortgage payment. I am not upcharging the rent because he is giving me all the cash up front. Will I be taxed on the income from the monthly rent or not because I am not actually gaining anything from it as its the same as the house payment. Jeff
What is the option price?
What is your cost basis?
What is the option term?
Is the $17K a down payment?
-Cost basis (If I know what that means) is what we owe which is about $134,200. We purchased for $133400 and re-fi'd twice. Our last re-fi was for $134,000 a couple of months ago.
-The $17,000 is a down payment on the option.
-Option price is $151950
Term is 4 years.
The buyer is my father-in-law and we are kind of doing this option a little differently. I am not going to charge him any extra money on the rent payments and he will give me the difference between what we owe and our full asking price of $151950 which is about $17000. He will be buying the house from us in probably two years or less. Just wanted to make it a 4 year term just in case. Is it better to make it a 2 year term and then extend it if need be? Thanks in advance for you help.
In a typical lease option, your tenant pays rent until the option is exercised.
Rent is reported on Schedule E (1040) offset by your mortgage interest expense, property taxes, and depreciation expense.
When the option is exercised, your profit on the sale become taxable unless you qualify for the capital gains exclusion on the sale of your primary residence. After three years of rental use, your property is automatically an investment property and no longer eligible for the capital gains exclusion.
In your case, when the option is exercised, your profit on this deal will be $18,550 (151960 - 133400). Additionally, depreciation will be recaptured at 25%.
The problem I have with your deal is that it really appears like a sale on contract for deed. If the IRS interprets it this way as well, then you will have a different tax picture.
Well we have lived their for two years. Please correct me if I am wrong but, as long as the buyer exercises the option within the next 3 years we will be able to be excluded from the capital gains?? Also can you tell me how a contract for deed will affect me tax wise?
If you have OWNED and OCCUPIED the house as your primary residence for at least two years, then you have a three year window on your eligibility to exclude your sale profits from capital gains taxes, but not depreciation recapture.
A contract for deed (in the eyes of the IRS) is the same as an installment sale. You would report the sale as an installment sale on your tax return.