Taxable or not

[ljwalters]

Client has rental property. Recieved $50,000 as depsit on a six month lease option to buy. Lease optin starts January 1,2010. But for some reason the purchasure gave her the check in november 2009 ( she said he wanted to make sure it didn['t get spent). Is this taxable now or at sale or as rent for 2010 tax year.

linda and buddy

[Maribeth]

Client has rental property. Recieved $50,000 as depsit on a six month lease option to buy. Lease optin starts January 1,2010. But for some reason the purchasure gave her the check in november 2009 ( she said he wanted to make sure it didn['t get spent). Is this taxable now or at sale or as rent for 2010 tax year.

linda and buddy

I had a similar situation a couple of years ago. Client received a deposit in the tax year for a sale of property in the subsequent year. My research concluded that the deposit was not taxable until the sale was concluded.

My situation was an outright sale, no lease involved. I would "assume" that in your situation the deposit would be taxable if the option to buy is not exercised. But that is just my assumption.

Maribeth

[ljwalters]

That was my thinking also I just wanted to see if someone else saw it the same way.

Thanks Maribeth

Linda and buddy

[imjulier]

Linda and Buddy-

Individual taxpayers are generally cash basis so since you don't know if the option to buy will be exercised, I'd think its taxable this year. If they have a business that they operate their rental through and operate on the accrual basis, that would be different. Problem is that this year will show huge profit and taxes due but next year will show huge loss which may or may not be deductible when you think about the loss limitations for rental properties (see 25,000 on form 8582). If sale of property goes through, that would be OK. Bottom line is, I think its taxable this year but it will make both this year and next look screwy.

Julie