Option to Purchase A gas Staion

[mike9]

How does one account for a transaction where the "buyer" makes a down payment or deposit to the "seller"  and retainsan the option to purchase the property and business within a spefied seriod while making " monthly option payments" 

Option 1 record as a Purchase and put  the assets on the books and the unpaid portion as a "Sellet Fiananced..

if option is abandoned..???

Option 2  treat it as a rental UNTIL the purchase is  consummated, crediting as income the payments so far deducted as  as rent? or as a reduction of purchase price....??

Never had to face this before ..I searched teh AICPA fo rguuidance and was not suceesful

Any help will be appreciated may be there is a very somple direct answer???

[TaxGuyBill]

I think I would want to see more details.  For example:

• Is the price set now, or will the 'final' selling price be determined when the 'option' is exercised?
• Are the monthly 'option payments' applied against the selling price?
• Is the down payment or deposit refundable?  Is it applied against the selling price?
• Who is paying for insurance?  Real estate taxes?  Maintenance?
• Maybe more details in the contract.

Without more information, it is difficult to make any decision for how to treat it for tax purposes.

[mike9]

Hi Bill

So kind of you to respond so fast on the last sday of our favseason:):)

Price is set .

A portion fo teh monthly apemetns are aopplied agaiinst purchase price

Down payment is refundable and it is a credit to selling rpice

"Optionee" is paying for all taxes and insruance 

[BobKamman · Accepted solution]

If "the down payment is refundable," it's not an option.  An option would be part of the proceeds if exercised, or income recognized when the option expired if not exercised.  

Who is operating the business right now?  The optionor or the optionee?

[Skylane]

Answer the others Qi’s and review the contract but

“A portion fo teh monthly apemetns are aopplied agaiinst purchase price”

sounds like rent to buy…

[TaxGuyBill]

The down payment/deposit is refundable?  That is really weird.  What is the purpose of it if it is refundable?

If it was NOT refundable, I would say it clearly looks like it was sold in an Installment Sale, regardless of their terminology of calling it an 'option'.  I still lean towards that it is an Installment Sale, but because the deposit is refundable, that portion would not be applied to the Installment Sale until it becomes non-refundable.

[taxes96786]

If you have a copy of the contract it is reported as an installment sale.

[mike9]

Thnaks so much for your response

The opionee is running  the business.You are right this is technically not an option per se...however this is very common when the property can not qulaify for financing ( contamination issues) in the near future ,so the "seller "makes a situtational decision to monetize the value as much as he can and finds a a "buyer" who is willing to run the business until he can get fiancing when the property is cleaned up

So the rtransaction never gets recorded as a sale unless and until teh re isa transfer of property

My thinkin gis that this is a Selelr financed sale.

[mike9]

I am beginning to think that   this is a Sale...and treat it as a sale back if "options' is abandoend