Tax help on lease purchase agreement!

[Jeffrey Honaker]

I bought two houses on the same deed in a lease purchase agreement in July 2017. I live in the single family and rent out the duplex. I have made repairs on the duplex and collected rent as well while also paying rent to the seller. I am intending to buy the property in July 2018. The IRS says it makes a distinction if it’s a true lease or if the buyer is likely to buy. I would like to know:

1. How to I file this on my taxes? I am using turbo tax but they don’t seem to have a catergory for this type of transaction. 

2. Can I write off my expenses for this deal? I have read that you can write off the payments but the language is so confusing I’m not sure who to believe. 

Help! 

Thanks,

Jeff Honaker 

[Ashish Acharya]

@Jeffrey Honaker ,  

@Alex Deacon is right. We can only help so much here . And. you need to provide us with little more detail on your Lease purchase agreement. 

Is it a really a lease? or is it an installment sale? Has title already passed to you? On your first sentence, you said you "bought" the houses. and again on 3rd, you said you intend to buy in 2018.

Even though you have treated this transaction as lease purchase agreement, looks like this is going to fall under sale rather than LPA.  Few issues have to be carefully analyzed such as a relatively short period of the lease period, the payments are applied to the equity interest, the lease payment exceeding the current fair rental value and so forth. 

If so the transaction is considered the sale and it will be categorized as an installment sale. ( even if a title has not been transferred). The seller has to recognize gain as well. 

For you will be making a monthy payment that has two component: 

1) Interest, this is deductible on your duplex as interest expense. on the personal side, as standard deduction has been increased to 12k, I doubt you will take an itemized deduction. so do not worry. 

2) Principle.

For you rental question on duplex: 

1)  Repairs you made on duplex will offset the income. There are many things to consider to make sure the repairs are deductible such as the timing of the repairs ( before or after placing in service). Or the " repairs" might be an improvement and needed to be capitalized and cannot be deducted. 

2) When you say expense for the deal, what kind of expense are you talking about? some of the expenses might be added to the basis of the property and recovered via depreciation. We do not know the detail.  Other might be deductible if you have other rentals.

3) If the sale falls under the installment sale, the portion of the payment can be written off as business interest expense. the payment of the principle is not deductible. 

As you can see there are many moving pieces. it is not that simple. Please talk to your CPA. 

Good luck.