In a lease-purchase agreement, will I, the seller have to claim the payments made by the potential buyer on my yearly tax return?

Asked by Grib23, Rossville, GA Tue Apr 26, 2011

Due to the market slump for sellers and the decrease in my home's value, I am considering a lease-purchase agreement on my home. Will the lease option and the payments I receive each month during the lease term have to be claimed on my yearly tax return as income?

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Curt Smith, Other Pro, Scottdale, GA
Wed Nov 2, 2016
The others have not hit the nail on the head: you will need to file schedule E for a rental. Minor complication is converting a primary residence into a rental, mainly to capture investment cost basis. So you will need to use an agent to give you a broker price opinion (BPO) is the cheapest way to determine value, free.

Ken's comment re the K-1 means he holds his rentals in a multi member LLC and he files a reporting return for the LLC and a K-1 onto his 1040. You no doubt are not holding title in this way.

The option fee is not income and is not reported. You book the option fee at the time of sale as part of the purchase price or if the tenants leave early and you keep the non-refundable option fee, then it becomes income through the schedule E.

The bottom line for the schedule E is that you deduct depreciation, you have expenses that get deducted, fix up, taxes, insurance, morgage etc etc. At most half of the rent becomes taxable so your tax hit will not be that bad. Plus you've recieved rent to pay the taxes. This is a good deal.

I'm an investor and do this type of deal a lot. Its a great way to cover the mortgage until appreciation allows you to sell at a profit.
0 votes
Ken Cook, , Atlanta, GA
Wed Apr 27, 2011
I am not an accountant, attorney or tax advisor but I have been a real estate investor and service provider for decades.

The others are, indeed, correct. It generally becomes a part of your K1.
0 votes
Brian Rayl, Agent, Dallas, TX
Wed Apr 27, 2011
I am not an accountant, tax adviser, or attorney, so this post is for informational purposes only and should not be taken as advice. Please confer with one of the above for that.

Irene is correct,

Everyone's situation is different, but generally you will have to count the rental income as income. If you are still paying on the mortgage on that property, you would write off the mortgage as an investment expense along with any other expenses that you pay either to get the property ready to lease or during the lease itself. This include real estate agent commissions.

Hope this help[s, but again seek the advice of a professional tax person before making any moves. (Isn't it sad that we have to go to these lengths to protect ourselves from liability these days? **sigh**)

It's more than real estate. It's RAYL-Estate!

Brian Rayl, REALTOR®, e-PRO, SFR
Keller Williams Elite Dallas Park Cities
972-949-4222
Brian@Rayl-Estate.com
Web Reference:  http://brianrayl.com
0 votes
Irene Moriar…, , Dacula, GA
Tue Apr 26, 2011
I am not an accountant but my guess would be that once you accept a lease agreement on your property, you become a landlord and the property then becomes an investment. Under this situation, you will have to disclose any payments from your tenant/buyer. With a lease purchase, the buyer is essentially your tenant until the purchase and sale agreement is executed.

The best thing you can do is contact a local tax specialist or certified accountant. Who does your tax return? If you don't do it yourself, the company/person who completes your taxes should be able to answer this question accurately for you.

All the best to you.....
Irene Moriarty Coldwell Banker Atlanta
404-433-8567
irene.moriarty@coldwellbankeratlanta.com
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