Rent to Seller in a SLO

[<Steve> 82]

In a Sandwich Lease Option deal the rent going to the seller is an expense...

 

So what do you call this expense on the tax return (Schedule E)?

[Dave T 0]

If you are in the middle of a sandwich lease option, then you report all your income and expenses on Schedule C -- not Schedule E. Your income is taxed as ordinary self-employment income.

 

Consult your CPA or licensed tax advisor for specific details.

[randian 0]

If you are in the middle of a sandwich lease option, then you report all your income and expenses on Schedule C -- not Schedule E. Your income is taxed as ordinary self-employment income.

That's not what my tax attorney (John Hyre) says. Put your sandwich lease income on Schedule E. Your option profits most likely go on Schedule C.

[Dave T 0]

Randian,

 

I don't disagree with John Hyre very often, but I disagree on this point.

 

A sandwich lease option is an active income business and, if done in your own name as a sole proprietor, the net income from that business is also self-employment income. In a sandwich lease option, you are the master tenant, subletting the property to your subtenant. The income from your tenant and the rent you pay your landlord are business income and a business expense reported on Schedule C. If your tenant exercises his option, and you use a cooperative assignment to get out of the middle of the sandwich, your assignment fee is also reported as business income on Schedule C (1040). Calculate your self-employment income taxes on Schedule SE (1040)

 

Go back to John Hyre and confirm this point specifically for the sandwich lease option. I think he will agree with me.

 

John Hyre does suggest an "aggressive" tax treatment for property you purchase outright then sell on lease option -- in effect you are flipping the property. John proposes that you use the Schedule E to report rental income and expenses until the option is exercised. John does warn you that the IRS will see a pattern of buying and selling your property on lease option every two years as a dealer activity, and will eventually recharacterize your tax treatment as business income. Until then, he says that an isolated sale every now and then is not likely to trigger IRS scrutiny. Just remember that "aggressive" is really a code word that means the tax treatment is not really correct, but has a 40% chance of surviving an IRS audit.

 

I am more conservative than John Hyre. I would rather take the correct tax treatment in the first place and never have an audit.