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ErikOk

CA Assignment Fee & Taxes

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I was just wondering how income taxes are usually handled with the Seller on a CA.

 

Obviously income tax is paid by me for assigning my contract.

 

Ex: $100k - $4k assignment/option = $96k. At closing the sale price is still $100k though according to the original contract.

 

But since the assignment is also considered option consideration, doesn't the Seller have to pay taxes on a larger sale amount (ex: taxes on the $4k)?

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They pay taxes on what they make in profit, so your $4k is already taken out of the equation.

Not a CPA, so I don't worry about it, but I think it's something like...capital gains on the profit...

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They pay taxes on what they make in profit, so your $4k is already taken out of the equation.

Not a CPA, so I don't worry about it, but I think it's something like...capital gains on the profit...

 

Ok, I just thought that since the Assignment Agreement stated that the Assignment=Option Consideration, then it would look like the Seller should have to pay on the full $100k.

 

I guess the way the Assignment Agreement is worded might help whoever does the taxes figure the tax situation out, & the fact that the Seller did not receive any of the Assignment/Option money.

 

Thanks for the feedback.

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Assuming the seller's holding period for the property in question is greater than one year. If the option is exercised, the option consideration the seller has already received is added to the proceeds of the sale. The difference between the seller's net proceeds on the sale and his/her cost basis is the seller's long term capital gain.

 

If the option expires worthless, the option consideration is recognized as a short term capital gain.

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Assuming the seller's holding period for the property in question is greater than one year. If the option is exercised, the option consideration the seller has already received is added to the proceeds of the sale. The difference between the seller's net proceeds on the sale and his/her cost basis is the seller's long term capital gain.

 

If the option expires worthless, the option consideration is recognized as a short term capital gain.

Thanks Dave. OK, the assignment fee goes to us.

 

On the CA Assignment agreement it states:

Any assignment fee paid shall be considered option consideration and will be credited in full towards the purchase price of the

subject property as specified in the Option to Purchase Agreement.

 

So, the Seller will not be required to pay taxes on that assignment fee since we are receiving it all and the Seller receives none of it, right?

 

Thanks,

Erik

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So, the Seller will not be required to pay taxes on that assignment fee since we are receiving it all and the Seller receives none of it, right?

 

Thanks,

Erik

 

Erik - You are correct. You would report the Assignment Fee as ordinary income. Since the Seller didn't receive the option fee (which became the assignment fee) he will report nothing if the option expires without exercise. Should the option be exercised the "option fee" will be shown as a reduction in the sales price of the property.

 

Hope this helps :)

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