Discussion:Real Estate Option Payments, Sale that falls through
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Discussion Forum Index --> Tax Questions --> Real Estate Option Payments, Sale that falls through
| 1 October 2006 | |
| I understand that option payments to purchase real estate is part of the sales price and recognized when the sale actually goes through. However, what if the sale fails? I understand that the option payments are includible as ordinary income.
Question: When are the option payments includible in income, the year when the scheduled sale fails, or the year (s) when the option payments were made? My client received payments during 2004, 2005 and was scheduled to close in 2006. thanks for your input. | |
Mtmckeecpa (talk|edits) said: | 1 October 2006 |
| Try Reg. 1.1234-1(b)
The year the option expires (lapses) or is exercised. Riley addressed in this post Discussion:Option Payment on Sale of Primary Home - when taxable | |
| 2 October 2006 | |
| If this is a rental property then the option payments are recognized as income as they are received, if they are non-refundable option payments. | |
Bulldogixxi (talk|edits) said: | 2 October 2006 |
| Reverse situation - taxpayer put $30,000 (roughly 10%) deposit on a lot in a new Florida condo development during the recent housing bubble hoping to flip it and double up. market collapses, developer demands rest of money for construction but taxpayer pulls out and loses deposit. Is this a capital loss and why? | |
| 2 October 2006 | |
| Tiffaney, the option payments on a deal that falls through are income in the year that the rights under the option lapse (expiration date). Remember that rights under an option are not extinguished merely because the buyer decides not to personally exercise the option. | |
| 20 June 2007 | |
| This is an old thread I realize, but wondering about Lois posting indicating option payments on a rental property are recognized as income as they are received. Any citing on this? It doesn't appear consistent, but have just this issue right now and want to make sure if this is correct or not. Also, what about open ended payments i.e. no sale date determined? How would such payments be taxable?
Thanks. | |
| 21 June 2007 | |
| No, the post by Lois is not correct. The income from unexercised options are recognized in the year that the rights under the option lapse. | |
| 22 June 2007 | |
| Thanks Riley. You are all over the board here. Does anyone know if an open ended option to buy is treated the same way. Also, it would appear that option payments impede the benefit of a 1031 i.e. all the cash received up to exercise of the sale would not be eligible for a 1031 and treated as boot. Correct? | |
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