Frequently Asked Questions

What are the tax consequences on the landlord as a seller in a lease option agreement?

In a lease option agreement, the landlord as a seller faces several tax consequences. Firstly, the option payment received by the landlord is considered as a down-payment. This means that it is not treated as rental income but as part of the selling price of the property. Secondly, the rental payments made to the landlord during the lease option period are also considered to be part of the selling price. This recharacterization of rental payments can result in either an ordinary loss or an ordinary long-term gain for the landlord. Another significant tax implication for the landlord is that the rental income, which is typically treated as ordinary income, is now considered as sale proceeds, also known as capital gain. This could potentially alter the landlord's tax bracket and the amount of tax they are liable to pay. Lastly, since the landlord is presumed to have disposed of the property in a lease option agreement, they’re not allowed to deduct any depreciation or rental expenses allowance. This could increase the landlord's taxable income, as these deductions often help to reduce the amount of taxable income.