Tax Implications of Flip and Option Cancellation

[Jackie P.]

1) Investor 1 takes over a house subject to a 65K balance and 3K back payments. Deed executed between seller and Investor 1.
2) Investor 2 puts a 1K option on the house with Investor 1 at a purchase price of 75K.
3) Retail buyer comes along to buy house from Investor 1 at 110K with 25K down.
4) Investor 1 pays Investor 2 40K to NOT exercise the option, 25K immediately and the balance in payments over time.
5) This is investor 1's first flip and will be the only one this tax year.

Other than the 1K option money which is ordinary income, what taxes will Investor 1 incur?

BTW, Investor 2 is a self-directed ROTH IRA. :wink:

Jackie