Kind of long tax question

[apbowman 0]

Ok let me see if I can get this out........I understand what paper work needs to be filled out at tax time..but I am still unclear on a few things..

1) Option consideration money you pay taxes on when the option is exercised or expired. But can you pay taxes on it the year you receive it if you want.

2) Monthly spread is it taxed in the year you receive it or when the option is exercised or expired.

 

Now are you taxed on each transaction or the course of a year...What I mean is lets say I have 3 Lease option going all Sandwich lease options....Now lets say over the course of a year I have a total expense of $10,000.00 and a income of $20,000.00 would I pay taxes on the 10K profit or on every deal I do. I know what I am trying to ask but don't think it is coming out right. Thank for any help

[Dave T 0]

In a sandwich lease option, you have three sources of revenue and each has a separate tax treatment.

 

The first is the option consideration. Option consideration is not taxable income, nor is it a deductible expense, until the option expires or the option is exercised. Until then, the option consideration is treated as a deposit. When the option is exercised, option consideration becomes part of the purchase price and is taxed accordingly. When the option expires, it is forfeited and then becomes ordinary income to your business. When this happens report it on Schedule C for the tax year in which the option expired.

 

The second revenue source is your monthly income stream. In the middle of a sandwich lease option, you are the master renter who sub-lets to a tenant. You pay rent to your landlord/seller and collect rent from your tenant/buyer. The rent you pay is a deductible business expense on your Schedule C and offsets the business income (the rent) you receive from your tenant/buyer. Report your monthly rental income and expenses on Schedule C for the year in which the income was received and expenses paid.

 

The last revenue source is the back end profit when the property is sold. Subtract the purchase price from your landlord/seller plus the option consideration given from the sale price to your tenant buyer plus the option conderation received. The difference is your taxable profit. For the year in which the property is sold to your tenant buyer, report the sale on your Schedule C. Compute your self-employment income taxes on Schedule SE.

 

Report all of your sandwich lease option activity for the tax year on a single Schedule C.