Tax questions on "Lease to Own" contractss


#1

I’m having a difficult time getting my CPA to understand what I am doing as far as the taxes are concerned with a Lease to Own contract. If it were a sales contract, then it’s really simple in that it is considered a capitol gain. But he is not sure how to handle a lease to own contract. Is it a sale or is it a lease and how are the taxes considered in this manner? Has anyone figured this out and what is the basis (IRS ruling) for that determination? Any and all help would be appreciated. Thanks, Bill


#2

Depends on how the L/O is drafted. In most cases, the lease portion of the deal is treated as a regular rental, with the option consideration being taxed when the the option expires, defaults or is exercised. When taxed, the underlying option consideration is taxed in the same manner as the underlying asset…so if the underlying asset is taxed at capital gains rates (usually the case with rentals), then the option consideration is also taxed at such rates. In terms of IRS rulings, etc - there is plenty out there. Frankly, if the accountant is unwilling or unable to inform himself without being spoon-fed by the client, it is time to get a new tax advisor.