MsTabbyKats Posted March 17, 2013 Report Share Posted March 17, 2013 This is a question from (yet another PITA that I would love to dump....very aggressive person) a client and it's a 2013 issue: The situation: She rents an apartment. She's been living there 20+ years. Her landlord wants to buy her out (so he can do something else with the building). Her question to me was: Is this long term or short term capital gains? Not running into this for years (if I ever did) I said...."I don't really know. But I would think it's ordinary income because you don't own the apt. And then I would have to see how her landlord reports the money". Her response was: My lawyer said it's a short term gain since I lived in the apt for over a year. My thought was...why bother me if you already know. But, my response was again.....it really depends on how it's reported. You and your lawyer don't decide where to put it. I have to put it in a tax return based on what information is sent to the IRS. Otherwise YOU get one of those nasty letters. I can't find anything official or even unofficial about this. In addition...it may be a "NYC thing"....where landlords are offered a lot for the property...and rental income is low (we have rent laws....a lot of people pay very low rents, including this woman because of the laws) so the landlord is more than eager to pay them to move. And...in addition, the tenant is always allowed to renew the lease. So the landlord can't just wait until the current lease ends. However, the tax code is federal...it's not written to accommodate specific regions....even if her lawyer "says so". Has anyone ever run into "lease buyout" situations. Again...I realize that this is probably a NYC specific situation....so I'm not expecting any concrete answers. Maybe just opinions... Thanks....... Quote Link to comment Share on other sites More sharing options...
ILLMAS Posted March 17, 2013 Report Share Posted March 17, 2013 Ah power the of google: http://www.taxalmanac.org/index.php/Discussion:Tax_on_Profit_from_Sale_of_Rent_Control_Apartment Quote Link to comment Share on other sites More sharing options...
MsTabbyKats Posted March 17, 2013 Author Report Share Posted March 17, 2013 Thanks...just more opinions! Nothing definitive Well...this is a "next year" thing anyway. But, when she comes this year, I'll tell her I have to report it on her tax return based on the information sent into IRS. If she isn't happy with that she'll have to go elsewhere. And so...another PITA will have to pound the pavements of NYC to find someone who will write what she, the client wants and charge her a fee that will justify the possible consequences. Quote Link to comment Share on other sites More sharing options...
jainen Posted March 17, 2013 Report Share Posted March 17, 2013 >>just more opinions! Nothing definitive << I agree--quoting Section 1241 of the Internal Revenue Code is just an opinion. Nothing Congress writes is ever definitive! Quote Link to comment Share on other sites More sharing options...
mrichman333 Posted March 17, 2013 Report Share Posted March 17, 2013 How can it be a capital gain if she never invested any of her capital. The rent she paid was rent not a capital investment. Quote Link to comment Share on other sites More sharing options...
mrichman333 Posted March 17, 2013 Report Share Posted March 17, 2013 this may help http://www.sfgate.com/business/article/Lease-Buyout-Is-Taxable-Also-following-new-IRS-2930574.php Quote Link to comment Share on other sites More sharing options...
mrichman333 Posted March 17, 2013 Report Share Posted March 17, 2013 and here is another interesting one http://www.justanswer.com/tax/7225f-landlord-offering-buyout-rent-stabilized-apt-lease.html Quote Link to comment Share on other sites More sharing options...
MsTabbyKats Posted March 17, 2013 Author Report Share Posted March 17, 2013 Yeah...read that one before too....another opinion that agrees with me. There is no rationale that makes it "capital gain". No investment = no gain Let her lawyer do the return. Quote Link to comment Share on other sites More sharing options...
jainen Posted March 17, 2013 Report Share Posted March 17, 2013 >>How can it be a capital gain if she never invested any of her capital.<< No investment just means zero basis. Lots of capital assets have zero basis. Quote Link to comment Share on other sites More sharing options...
MsTabbyKats Posted March 17, 2013 Author Report Share Posted March 17, 2013 >>How can it be a capital gain if she never invested any of her capital.<< No investment just means zero basis. Lots of capital assets have zero basis. But she still doesn't own the apt. You know, I'm not even positive she has a lease. This is an "apt" between two buildings. It was an alleyway...and the owner converted it to a unit without heat (which is illegal). Her bf lived there....she moved in...bf ultimately moved out. She stayed. She stayed because the rent was really low due to the fact that there was no heat. This was 15 years ago. Oh...my rule is....I don't do anything that will get me in trouble. I don't do anything stupid. I don't do anything that I know will most likely cause future issues. I'm not wiling to spend hours of my time trying to prove myself wrong 1 Quote Link to comment Share on other sites More sharing options...
jainen Posted March 17, 2013 Report Share Posted March 17, 2013 >>But she still doesn't own the apt.<< What is "ownership"? In legal terms it is a specific bundle of rights, things you are allowed to do with property (but excludes other rights to do everything you might want). Her leasehold transfers some of those rights to herself, such as the right to live there and have privacy. Even in the form of month-to-month, she has held a lease for 15 years. Section 1241 explains that "Amounts received by a lessee for the cancellation of a lease" are treated as a sale of property. Although that makes sense to me, I'm not going to argue that it's logical. It just happens to be the law, that's all. Quote Link to comment Share on other sites More sharing options...
michaelmars Posted March 17, 2013 Report Share Posted March 17, 2013 I'll tell her I have to report it on her tax return based on the information sent into IRS. If she isn't happy with that she'll have to go elsewhere. And so...another PITA will have to pound the pavements of NYC to find someone who will write what she, the client wants and charge her a fee that will justify the possible consequences. WHY do you care how the landlord reports it? what makes him right. You have to report it correctly and be prepared to defend a difference in reporting to the irs later on. If the landlord put it in box 7 subject to fica would you make your client pay fica just so you match what was sent to the irs? Do your homework or pass the client on but this is not really an unusual stituation for rent controlled apartments. Then report is as your professional opinion justifies not how the landlords accountant decided. Quote Link to comment Share on other sites More sharing options...
MsTabbyKats Posted March 17, 2013 Author Report Share Posted March 17, 2013 WHY do you care how the landlord reports it? what makes him right. You have to report it correctly and be prepared to defend a difference in reporting to the irs later on. If the landlord put it in box 7 subject to fica would you make your client pay fica just so you match what was sent to the irs? Do your homework or pass the client on but this is not really an unusual stituation for rent controlled apartments. Then report is as your professional opinion justifies not how the landlords accountant decided. She isn't rent controlled. Possibly stabilized. Probably just paying on a month to month basis. Obviously if it reported in Box 7 I would tell her there is an error. I am assuming that the landlord's accountant will report it as it should be reported. However, if it's reported, let's say in Box 3....I'm going to tell her she needs someone else to do the return, because I don't have any experience with this situation and I'm not going by what her lawyer says. This is my husband's friend's wife's sisters friend....nothing more than an acquaintance to me....who I've been trying to drop for the past 3 years (because she's very aggressive...tax wise and personality wise). But she keeps insisting she wants me to do her return. Quote Link to comment Share on other sites More sharing options...
mrichman333 Posted March 17, 2013 Report Share Posted March 17, 2013 A lot of this talk is mute for now since the current administration has his eye on capital gains and want to tax the heck out of them, who knows what the rates will be next year, it may make little or no difference Quote Link to comment Share on other sites More sharing options...
grandmabee Posted March 17, 2013 Report Share Posted March 17, 2013 >>But she still doesn't own the apt.<< She owns the lease. Quote Link to comment Share on other sites More sharing options...
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