Option fees-pay taxes on when exercised/expired?

[CS1977 0]

If I made money by way of option fees on three cooperative assignments in 2006 and the tenants have not exercised their options yet (and they don't expire until later this year)--when is that tax due on them? When the options are exercised or expired? I have heard that but I have also heard tax should be paid for the year you made that money in.

 

Please note these are CA's, not sandwich lease option.

 

Please advise!! Thanks.

[Dave T 0]

In a typical lease option arrangement, you lease option a property to a tenant-buyer. You collect option consideration up front, monthly rent until the option is exercised or expires, and some profit on the sale of the property when the option is exercised. At the time the option is exercised, you are a principal in the deal. That is you go to the settlement table with your tenant-buyer and transfer title to the property. When the option is exercised, the option consideration received has the same effect as a downpayment toward the purchase price. The IRS considers the option consideration as a deposit until the option is exercised, at which time the option consideration becomes taxable. If the option expires without exercise, then the option consideration is forfeited at which time the option consideration becomes taxable.

 

It does not matter if you are the property owner or the middleman in a sandwich lease option. The tax treatment is the same when your tenant buyer's option is either exercised or expires.

 

As I understand the cooperative assignment, you enter a lease option arrangement with a seller. You then find a tenant buyer who pays you some option consideration for an option to purchase. At this point you are in a sandwich lease option. The difference here is that you turn around and assign your tenant-buyer's lease option contract to your seller, keep the option consideration paid by your T/B, and get a release from the original agreement you had with your seller. You are no longer a principal in the deal. You sold (assigned) your position back to the original seller. Whether or not the option is exercised, you are out of the middle.

 

Is this the structure of your deals?

 

If so, then the option consideration you collected is taxable income to you in the year you assigned your contract back to the original seller. It does not matter that the T/B has not exercised the option yet, because you are no longer a principal in the deal. You sold your contract and kept the option consideration as your assignment fee. Your income is taxable in the year in which you assigned your contract.

 

If this is not the structure of the deals in your situation, then you will have to give more details about the structure of your deal.

 

As I recall, you had an appointment last month to discuss this question with a CPA. What was the answer you got from the CPA?

[CS1977 0]

That's what the CPA thought and I agree--I think the confusion came from sandwich leases, which these were not. Thanks!