Can Only a PART of paid OPTION Consideration Funds be NON Taxable ?

[Michael Morrongiello]

Can Only a PART of paid OPTION Consideration Funds be NON Taxable ?
In the process of BUYING a PURE Option to buy a SFH subject to an existing loan (at a lower fixed long term interest rate)
Let say the OPTION "Strike price" to BUY the property IF or WHEN the OPTION is EXERCISED is $300K

The seller wants $60K to sell us the OPTION. 
Our understanding is that if we designate the $60K as "OPTION CONSIDERATION" - these funds and the USE of these funds are NOT Taxable to the property seller UNTIL one of two things happen; # 1 the OPTION gets exercised, or # 2 the OPTION gets cancelled.

Now we negotiated ALL of the $60K Option Consideration funds paid to be APPLIED towards the $300K Property Purchase STRIKE PRICE. The Seller did not understand or misunderstood and thought that NONE Of these $60K in funds would be credited or APPLIED towards the $300K property purchase STRIKE PRICE.   To "soften" or reach a compromised we agreed to ONLY have $30K of the $60K in funds be considered "OPTION CONSIDERATION" funds (giving us the EXCLUSIVE RIGHT to buy the property at the $300K Purchase price) and the OTHER $30K of funds would be STILL be given to them but we informed them that it likely will be consider TAXABLE INCOME to them.  

QUESTIONS:
1- We assume we can structure the Pure Option this way ? 
2- IF only $30K is labeled & considered OPTION CONSIDERATION funds paid for the OPTION (thus Not immediately taxable) 
    What do you call or or would be a proper way to DESIGNATE the other $30K in funds given to the Property Seller?
   And is it as we thought TAXABLE to them?
3- If its Taxable to them; Must we issue them a 1099 next year for the $30K also paid to them or HOW would you handle that? 

Appreciate the input .... 

Michael M. 

[Michael Plaks]

Quote from @Michael Morrongiello:

2- IF only $30K is labeled & considered OPTION CONSIDERATION funds paid for the OPTION (thus Not immediately taxable) 
    What do you call or or would be a proper way to DESIGNATE the other $30K in funds given to the Property Seller?

A generic comment first. "Labeling" is not relevant for taxes. What matters is how the deal is structured in reality, not what it is called. Side note: possibly labeling is what caused the disconnect in your situation, to begin with.

Specifically in your case, your re-negotiating of the option credit does not trigger an immediate taxation. All it changes is how much you have to pay the seller at exercise. You thought an extra $240k, they thought an extra $300k, and you settled on $270k.

The new taxation for the seller is:
- nothing now
- if exercised in 2025, they sold the property for $330k in 2025
- if expired in 2025, they keep your $60k and report ordinary income of $60k in 2025