Discussion:Lease with option to buy
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Discussion Forum Index --> Basic Tax Questions --> Lease with option to buy
Discussion Forum Index --> Tax Questions --> Lease with option to buy
| 31 December 2007 | |
| If a person has a lease with option to buy. I assume he treats the lease payments and rent paid and the landlord treats the payments as ordinary income. Now 5 years later he exercises his option to buy with a balloon payment of 10K. When the option is exercised on the land leased. How will the landlord not treat the sale and the tenant now treat the sale what will be their tax issues
Neil | |
Bottom Line (talk|edits) said: | 31 December 2007 |
| There should be some type of document that outlines this. Some of his lease payment may have been applied to the purchase price. You won't know without seeing the documents (both when the lease started and when the ownership changes). The ones of these that I see usually have a formal closing through a title company when the ownership changes because there's a loan involved. | |
| December 31, 2007 | |
| And assuming that some credit is given, both buyer and seller are merely working from a reduced deal. The buyer gets a credit, reducing his cost basis. The seller gives the credit, increasing his. You don't go back and redo old returns. | |
Bottom Line (talk|edits) said: | 31 December 2007 |
| Agreed | |
| 31 December 2007 | |
| so if the payments are rental and then the option to buy is exercises the seller reports amount received as 10K and the buyer reports 10K and the basis for his new property?
Neil | |
| 31 December 2007 | |
| But perhaps some of the rent payments were also considered partial down payments. Many times with an option, the lessor will allow a percentage of rent payments be applied toward a down payment. As BL states, you need to have documentation to determine what was rental and what was early deposits on a down payment. | |
Bottom Line (talk|edits) said: | 31 December 2007 |
| Those early payments would change the basis (buyer) and the sales price (seller). | |
| December 31, 2007 | |
| And they're still rent until/unless the option is exercised, unless refundable, which I've never heard of. | |
| 1 January 2008 | |
| but pub 535 states that a conditional sale, which this looks like, lease with option to buy is a sale and can be treated as an installment sale | |
| January 1, 2008 | |
| I don't think it's a conditional sale. It's a mere lease that provides an OPTION to buy. No one is compelled to do anything until/unless the option is exercised. | |
| January 1, 2008 | |
| Nshnider: What does the lease/buy option agreement say? | |
| 2 January 2008 | |
| there is no obligation but the lease has a balloon payment for the buyout | |
Bottom Line (talk|edits) said: | 2 January 2008 |
| Sounds like you're getting a lease option and a conditional sale agreement confused. You may need to cut & paste part of the document here so we can look at it. | |
| 14 March 2008 | |
| *Thought* I was done with a return, when client happens to mention that the lease is a lease to buy. So I asked for lease agreement. I don't think this is an optional agreement. I think it's a purchase agreement, even though it says lease. Here's what it says:
1 payment at $x followed by 47 payments at $y Purchase option: at the end of the lease, you agree to purchase the equipment for $1. I can find nothing in the lease that allows them to stop leasing, but I am continuing to look. Is my hunch correct that this is not a lease? | |
| 14 March 2008 | |
| I agree, by the defintion:
(c) if there is an option to purchase the asset at a "bargain price" at the end of the lease term. In this case, I should be depreciating this asset, and deducting the interest, just as though this was a purchase with a loan, correct or am I missing something? | |
| 14 March 2008 | |
| correct. The lease agreement & leasing agency is not likely to give you the interest rate & if they did I would check it. You can figure an amortization schedule by knowing the price of the item if purchased for cash, the monthly payment (without sales tax, if charged) & number of payments. I use [1] to calculate the schedule. | |
| 14 March 2008 | |
| the site is www.hsh.com - I neglected to include this info & only included a link | |
| 14 March 2008 | |
| Thanks much. Actually there is an interest agreement that says 1.2% per month, but I also have the total cost and the monthly payments, so I can figure it both ways. Thanks for the reference too! | |
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