Sell of Business Property as lease with option to buy

[elated]

I have a C-Corp that is selling his building (principal place of business) as a lease with option to buy.

The lease requires a $10,000.00 monthly rent for two years and at the end of the two years the monthly rent to be credited to option to purchase. Should the sell be set up as form 6252 or as rental income and then in two years when purchased as a sell for the balance of the purchase price. I hope I have explained enough to get an answer.

Thanks Elaine

[IRonMaN]

You use the terms sale and lease interchangeably.  What is the real intent - did they sell the building or are they renting it out?

[qbteachmt]

Every time the word option is part of this, there is no Sale until that option is exercised. It didn't happen until it happens, in other words.

[BobKamman]

It's a lease unless it's a sale.  Depends on facts and circumstances.  Here is one online explanation:

A lease with an option to purchase, also known as a "lease option," is a common real estate arrangement. The important income tax question in lease-option transactions is whether the tenant is leasing the property or, as an economic reality, an installment sale has occurred prior to the tenant exercising the purchase option.

The answer to this question depends upon an analysis of all the surrounding factors, because no single factor determines whether or not a lease option is, in economic reality, a sale. As Gerald J. Robinson, a noted tax authority, observed in the Federal Income Taxation of Real Estate, a determination includes studying many factors, "including the terms of the lease, the surrounding economic circumstances, and the intent of the parties....A collection of telltale signs leads to the conclusion that exercise of the option was virtually certain from the outset, so that treating the entire transaction as a sale is warranted."

If a lease option is treated as a sale, there are two important tax implications:

The timing of the transfer of ownership of the property is changed. With a "true" lease option, ownership transfers when the option is exercised. If the transaction is treated as a sale, then ownership transfers when the parties execute the original agreement. (For an examination of the tax consequences of a "true" lease option, see "Consider the Consequences of Your Options," CIREJ, Spring 1995, page 21.)
The nature of the option payment and the rent payments during the lease period are changed.
Because the tax treatment of a purchase transaction is so different from a lease transaction, it is important to understand the factors that may lead the Internal Revenue Service (IRS) to characterize a lease-option transaction as a sale.

https://www.ccim.com/cire-magazine/articles/lease-option-or-installment-sale/

[elated]

The lease agreement says "Tenant shall pay monthly rent in the amount of $10,000. which shall be credited towards purchase price in the event tenant exercises it's option to purchase. I guess my question is if I treat the $10,000. as rent then in the future when the tenant exercise it's option to purchase and the rent is credited to the purchase price, will that reduce the purchase price at that time. I feel like if we don't reduce the purchase price by the prior rent paid then client will pay tax on the income twice.

Hope this makes since.

Elated

[PATAX]

@elated the above posts and advice to you are sound. If you need more guidance than I would suggest contacting another CPA or tax professional in your area who has experience in this matter and/or research it further. Also Google can be your friend.

[sjrcpa]

You'll also need to know what happens if tenant doesn't exercise the option.

And, is $10,000 per month fair rental value? Or is it more than fair rental value?