Residential Tenant Surrender Agreement/Buyout

[ea_rva aka acctgtaxmatters]

Hello All,

I have a client who is receiving $37,000 ($5,000 in 2022 + $ 28,000 in 2023) for buyout by landlord of her apartment lease. Per Stotis v. Commissioner I am treating as sale of a capital asset.

1) How do I handle the related legal or moving expenses? Can these be recovered/included and do I just add to her $0 basis?

2) Is the ST or LT aspect of the gain determined by the date she entered into the lease through termination date (date landlord sells the property) or date she vacates the property?

Thanks all for your help! 

[BobKamman]

When did she sign the agreement, and when did she collect the first payment?  

Stotis isn't really the precedent for calling it a capital asset; there are many previous cases from higher courts, cited in that Memorandum opinion, that are better authority.  But it's an example of how the legal fees could be added to her basis.  I'm not sure about the moving expenses.  A lease implies that eventually she would have to move, right? So I don't see that paying them sooner than expected, makes a difference.

Does this qualify as an instalment sale?  Don't those rules apply only to real estate, these days?  Maybe a leasehold interest is included?  Are you planning on reporting it over two years?  

[ea_rva aka acctgtaxmatters]

She executed agreement on 09/12/22 and received $5,000 on 09/17/22.

She will not receive any additional until Jan 2023 when building is sold. Although...the way I read her agreement, she is entitled to receive $15,000 5 days after she vacates as long as she notices the landlord (otherwise 120 days) so she could receive more in 2022 assuming she vacates and properly notifies.

I'm not sure what the sales date is in this case. Can I get input on that? For an installment sale, wouldn't the sales date have to be in tax year 2022?

[sjrcpa]

"She executed agreement on 09/12/22"

That's the date of sale.

[ea_rva aka acctgtaxmatters]

Thanks all for your help! Installment sale, including attorney's fees to basis and sale date = agreement execution date is how I am proceeding.