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Here's the situation I was wondering if I could get some help with:

 

Tenant buyer for a property I have has just recently sold their townhome.

 

Tenant buyers are going to put down $8,000 option consideration for the rent to own property.

 

Can the $8,000 be deducted from their taxes since they are investing this money back into real estate or is it subject to sales tax on the sale of their townhome?

 

Thanks in Advance,

 

Kurt....

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Under Section 121 of the Internal Revenue Code, the sale of the taxpayer's primary residence is the triggering event to determine whether capital gains taxes are due. It does not matter what the taxpayer does with the sale proceeds -- even if they are reinvested into a new home or other real estate -- capital gains taxes (if any) are paid on the sale profits in the year they are realized.

 

Sales tax is levied by the state. As far as I am aware, no state levies a sales tax on real estate. Some states have some of the sales proceeds withheld at the settlement table. For example, California withholds 3.3%. If the seller is a non-resident, MD withholds 4.75% and SC withholds 6%. Other states may also have provisions for withholding a portion of the sale proceeds. These are not sales taxes, but just withholdings against state income taxes. The taxpayers may recover this withholding in their state income tax refunds when they file their state income tax returns.

 

Option consideration paid is not a deduction either. The option purchased is a capital asset. When the tenant-buyer exercises their option, the option consideration already paid is included in their cost basis for the property. If the option expires, then the option consideration paid may be claimed on Schedule D as a capital loss.

 

Since these questions only relate to the effect upon your tenant-buyer's tax return, I wonder whether you are trying to give your tenant-buyers tax incentives to deal with you. This is very dangerous ground. If asked about income tax treatments, most real estate professionals will just tell their customers or clients, "I am not a tax professional. For specific guidance on the income tax treatment for any aspect of this transaction, you should consult your own tax advisor."

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Kimberly,

 

Because the tenant-buyer in this situation has already completed settlement on the sale of his/her townhome, I did not consider any settlement fees already paid as relevant to the lease-option transaction sparetimeinvestor is asking about.

 

Since sparetimeinvestor was referring to a large option consideration payment and suggested that the source of funds for this payment is money received from the sale proceeds of the tenant-buyer's townhome, I suspect that he was thinking about the old primary residence replacement rollover rules that permitted a homeowner to defer capital gains on the sale of a primary residence if a new more expensive primary residence is purchased within two years.

 

These tax rules were repealed in 1997 and replaced with the new two year ownership and occupancy rules we find today in Section 121 of the Internal Revenue Code.

 

I further suspect that sparetimeinvestor really meant to ask about capital gains taxes and not sales taxes, but I could not be sure. I just gave a broad response to cover all the specific points raised in the original question.

 

I know that only sparetimeinvestor can tell us what he really meant when he asked the question, and whether my response did answer the question he meant to ask.

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