tax treatment for lease option income

[Teresia Sayler]

What is the tax treatment for the different income streams from Lease Options?  Is the Option fee self employment income (business income) when rec'd by a "future potential buyer"?  Can the monthly income be "rental income" reportable on schedule E, even if you don't own the property yet,  as in a sublet situation (you yourself are in a lease option arrangement on the same property)?  If so, you'd be able to deduct the rental payment you make to the seller if you yourself are subletting, until you exercise the option, as well as any other normal landlord type expenses?

[Ashish Acharya]

Originally posted by @Michael Plaks:

@Ashish Acharya - I think you're taking it too far assuming that the sale has happened. Nothing in the OP's story indicated it, other than a nominal amount credited towards the purchase price. 

• The option has not been exercised. 
• The option fee has not been applied to anything and is not excessive (10%). 
• No indication that the monthly payment is excessive compared to fair rent.

I meant if the transaction had already occurred, the first phase would be treated as sale vs lease based on the 

That’s why said I am assuming it has occurred and asked to hire a professional if they were in planning phase. 

Also,

Option doesn’t have to excersied to treat it as sale. There would be no issue if option had been executed, it would be a sale. 

The monthly payment did have an equity built on it. The intention of the parties is like an installment sale. 

[Teresia Sayler]

The entire scenario is just that, a sample scenario, as I have yet to do my first one of these.  I tend to do as much research as possible before I try something new, so I know what I'm getting into.  I do not currently have Sched C income, so I need to have that prepped for, as I would now have SE tax to worry about as well.

I need a certain cash flow for me to be comfortable with going forward.  I want all costs I can think of considered, tax, holding, expenses, mtg, hoa dues, whatever.

I really appreciate the dialogue here!

[Michael Plaks]

Originally posted by @Ashish Acharya:

Originally posted by @Michael Plaks:

@Ashish Acharya - I think you're taking it too far assuming that the sale has happened. Nothing in the OP's story indicated it, other than a nominal amount credited towards the purchase price. 

• The option has not been exercised. 
• The option fee has not been applied to anything and is not excessive (10%). 
• No indication that the monthly payment is excessive compared to fair rent.

I meant if the transaction had already occurred, the first phase would be treated as sale vs lease based on the 

That’s why said I am assuming it has occurred and asked to hire a professional if they were in planning phase. 

Also,

Option doesn’t have to excersied to treat it as sale. There would be no issue if option had been executed, it would be a sale. 

The monthly payment did have an equity built on it. The intention of the parties is like an installment sale. 

You yourself listed the 3 conditions. Out of the 3, only the first one is a yes, and a very flimsy yes at that. Just $50/month.

A looooong stretch to conclude this was a sale, IMO.