CAPITAL GAINS - Ugghhh!

[Troy_Ross 0]

Let me state: " I HATE CAPITAL GAINS TAX!"

 

Since a seller presented this question to me (and I was not so sure about it), I'll ask the expert(s):

 

1) What EXACTLY does a seller face with capital gains IF a tenant buyer exercises their option to buy within the first 12 months of the lease purchase agreement?

 

 

2) Ditto - except change the terms - "after 12 months of the lease purchase agreement?"

 

3) What does the middle man (us) face when it comes to capital gains tax and sandwich lease purchasing?

 

- Troy

[Dave T 0]

1) What EXACTLY does a seller face with capital gains IF a tenant buyer exercises their option to buy within the first 12 months of the lease purchase agreement?

 

A. If the seller is selling his primary residence, and if the seller meets the 2 year ownership and use tests, then up to $250K (per taxpayer) of the profit on the sale is tax free.

 

If the seller's property is an investment property, then the profit on the sale is a taxable capital gain.

 

 

2) Ditto - except change the terms - "after 12 months of the lease purchase agreement?"

 

A. If the seller is selling his primary residence, and if the seller meets the 2 year ownership and use tests, then up to $250K (per taxpayer) of the profit on the sale is tax free provided the settlement takes place within three years of converting the property from a primary residence to a rental.

 

After three years of rental use, the profit is taxable as a capital gain on the sale of investment property and the capital gains exclusion is no longer available to the seller.

 

 

3) What does the middle man (us) face when it comes to capital gains tax and sandwich lease purchasing?

 

A. When you are in the middle of a sandwich lease, and your tenant buyer exercises their option, then you must also exercise your option and (perhaps) use a double closing. Your profit is a short term capital gain.

 

 

4) You did not ask, but how is the option consideration treated when the option expires worthless?

 

A. Option consideration realized from an expired option is taxed as a short term capital gain, regardless of the length of the option period.

[Troy_Ross 0]

4) You did not ask, but how is the option consideration treated when the option expires worthless?

 

A. Option consideration realized from an expired option is taxed as a short term capital gain, regardless of the length of the option period.

Dave -

 

You are the man! Thanks! I might incorporate this into my script for sellers (at least I know what the ramifications are now). And yes, I kinda-sorta forgot about the option consideration money.

 

Thanks again.

 

- Troy

[MichaelC 160]

Dave -

 

You are the man!

Dave T is da man, indeed! Word has it the T stands for TaxMan.

[Dave T 0]

I might incorporate this into my script for sellers (at least I know what the ramifications are now). And yes, I kinda-sorta forgot about the option consideration money.

Troy,

 

I don't think you want to be giving your sellers tax advice. If asked, you should tell your sellers that you are not a tax professional and that they should consult their personal tax advisor for specific details. Suggest that their personal tax advisor is in a better position to advise them on possible tax deferral strategies if there is a tax ramification to deal with.

 

Don't put this stuff in writing, and do not make it a part of your standard script. Let's try to avoid any problem that may occur when the tax rules change (the President's tax cut has to be funded somehow) and this part of your script is no longer valid.

[Troy_Ross 0]

I don't think you want to be giving your sellers tax advice.  If asked, you should tell your sellers that you are not a tax professional and that they should consult their personal tax advisor for specific details.  Suggest that their personal tax advisor is in a better position to advise them on possible tax deferral strategies if there is a tax ramification to deal with.

 

Gotcha - the KISS method. Will do.