Who reports income from the T/B ME or the property

[Guest Big Don]

I see websites that talk about the L/P advantages. One advantage is the the seller can still deduct the interest on the house during the option period. That sounds great, but what about the income from the rent ? That could raise the sellers taxable income substantially ? Your comments please.

[Dave T 0]

Remember, that the property owner who "sells" in a lease option or lease purchase deal is a landlord until the option is exercised. The landlord-seller treats the rent collected as rental income and takes all the normal rental property expense deductions to which he is entitled -- including depreciation.

[<Steve> 82]

It's also my understanding that any rent credits given are not taxed as income until the option to purchase is exercised or not.

 

<S>

[Dave T 0]

Steve,

 

This is technically correct. But in practice, it is much simpler, instead, to let rent credits reduce the contract sale price to the tenant-buyer, and therefore reduce your taxable profit when the option is exercised. Then, all collected rents are taxed as ordinary income when received just as if you are operating a straight rental.

[Guest Big Don]

Thanks Dave T

 

Put your self in the sellers shoes for a minute. Would you take excellrated depreciation?

[Dave T 0]

If the option is exercised, it really makes no difference whether an accelerated depreciation schedule or the straight line schedule is used. The tax effect will be the same

 

For capital assets with an asset life greater than the option period, I personally would not take an accelerated depreciation (that is just my preference). When the property is sold, depreciation taken that is greater than the straight line depreciation schedule is treated as ordinary income (and taxed at ordinary income tax rates).

 

On the other hand, during the rental period the landlord's accelerated depreciation reduces his taxable rental income. Although, when the taxes are paid on the depreciation that exceeds the straight line schedule, the seller will have a slightly higher tax liability over the straight line depreciation schedule. The net result will be the same as if the taxpayer had used the straight line depreciation schedule all along.