How are option fees taxed?

[Ernie Hogue]

Hi BP community. I searched in the Tax and Legal forum, but didn't see this question answered specifically. I am trying to determine how lease option up-front option fees are taxed. My understanding is that they are reported as "Miscellaneous Income" to the IRS, but I can't figure out how this income is categorized. It seems that is might be classified as rental income (therefore passive) under Sect 1.61-8 of the Treasury regs, but I am way out of my area of expertise here.

Can anyone who has successfully completed lease-option projects or has experience with reporting your option fees provide an outline of how those fees were treated for tax purposes?

Thank you in advance,

Ernie