Other Income..???

[DevM]

Have a client recevied 10k from the Landlord for vacating the Apartment. Had Cleint speak to Landlord's bookkeeper and was told there would be NO 1099 issued.

Client wants to report the amount. My inclination is to report on Line 21 of 1040 (Under ????)

Have been on the phone with IRS for over an hour and still on Hold.

Any thoughts on this would be greatly aprredicated.

[Medlin Software, Dennis]

Good old "cash for keys"... I believe you are correct on how to report, and there should have been a 1099.

[michaelmars]

I Believe a lease buy out is a capital transaction since he is selling an intangible right to occupy the apartment. also any moving costs can be used as an offset as well as any of the money that represents payment for leasehold improvements, [carpet etc.]

[DANRVAN]

Amount realized by tenant from lease buyout treated as capital gain

PLR 200045019

<a name="NEWSARC:54890.2">IRS has privately ruled that a landlord's payment to induce a tenant to move could be treated by the tenant as capital gain from the sale or exchange of a leasehold interest. That was true even though the tenant didn't actually have a lease in effect when the payment was made. He was occupying the premises under rent-control laws that apparently didn't require a lease.

Facts. A taxpayer we'll call Smith had entered into a commercial lease in a building. The lease was subsequently renewed for a period of years. Smith filed a rent overcharge complaint against the landlord on the ground that he had used the premises predominantly as a residence and, as a result, the premises were subject to his city's rent-control laws. He won the case and retained the right to continued possession of the premises for an indefinite period without a written lease. Smith's landlord agreed to pay him a fixed sum for agreeing to give up his apartment. The sum represented (1) a dollar amount for his interest in the premises, plus (2) enough money to cover estimated taxes. The second element was determined on the assumption that Smith's gain from the transaction would be treated as capital gain. In the event that the gain would be treated by IRS as ordinary income, the landlord promised to pay an additional amount, plus interest and penalties. The landlord also agreed to pay an undisclosed sum to the lawyer who had represented Smith to cover his legal fees.

Favorable ruling. IRS said it wasn't clear whether the leasehold was a capital asset under Code Sec. 1221 or a Code Sec. 1231 asset (because it may have been used for business purposes partially or for part of the lease period). In either case, however, IRS ruled that the gain recognized on the leasehold would be treated as capital rather than ordinary gain. Reasoning: Case law established that the right of possession under a lease or otherwise was a substantial property right which, if sold at a gain, would produce capital gain. On the particular facts of the ruling, IRS said that the holding period began with the vesting of Smith's statutory right of occupancy to the premises. Because Smith held this right for more than one year, his gain was treated as long-term capital gain.

IRS also ruled that the landlord's payments to cover Smith's legal expenses, and his tax bill, were part of the purchase price to the extent they were made for Smith's leasehold interest and not for Smith's abandonment of some other legal right or property not related to the lease transaction.

References: FTC 2d/FIN ¶ I-6341; United States Tax Reporter ¶ 12,214.31; United States Tax Reporter ¶ 1234A4; TaxDesk ¶ 25,08