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?

[Account Closed]

Originally posted by @Michael Plaks:

Originally posted by @Account Closed:

Originally posted by @Michael Plaks:

@Teresia Sayler

It's legal to do Lease Options and collect Option fees in Washington and Arizona. 

You're not paying attention to the discussion, Mike. It's legal when you OWN the property. She does NOT own the property - she has it under LO herself. Until she exercises her option, she is merely a renter. So my non-lawyer opinion is that she cannot legally sell this property, LO or otherwise, until she exercises her own option.

 Correct. She can not sell a property she doesn't own. Since she has a sub-lease/option, it is not a sale. It is an Option to the sub-optionee. If and when the sub-leasee/optionee decides to exercise the option and fulfills the agreement and the option, she is then forced to complete her option agreement (buy the property if only for a few hours) and pay the original seller before she can close on the sub-leasee/optionee. It's called a double closing.