Lease/Option Taxes - Posted by joel

Posted by JHyre in Ohio on March 18, 1999 at 06:05:21:


Q#1: Pay tax on full rent less any deductions (interest, etc.). Credit is an upward adjustment to basis/downward adjustment to selling price if exercise occurs.

Q#2- May have Original Issue Discoint (OID) rules apply which serve to impute interest during the term of the loan- basically taxable amortization of premium/discount. That’s what happens with most 0-coupon bonds.

Q#3- No, it’s not illegal, people do it every day. Watch out for usury laws if interest rate is too high- depends on your state.

John Hyre

Lease/Option Taxes - Posted by joel

Posted by joel on March 18, 1999 at 01:02:55:

I’m fairly new at this, so these questions might sound a little ridiculous…but, I would appreciate any input.

(Q-#1) In the case of a L/O in which the seller agrees to a 50% rent credit, does the seller pay taxes on the full rent they are receiving or just the part that is not credited.

For example, Seller is lease optioning property for $500/mo with $250/mo creadit toward the purchase price. Will the seller be taxed for the $6,000 they receive in income from that property in that year, or will they just be taxed for just the $3,000 that is not being credited?

(Q-#2) If a seller has a property on the market for $65,000 and buyer agrees to pay the full price at 0% plus a premium of $15,000 = $80,000…will the seller have to pay an income tax since he technically isn’t earning interest on the property?

(Q-#3) Is there any way in which the previous scenario might be considered illegal?