ACCOUNTANTS - Question

[Guisslapp]

I have a question about how to characterize money I received in a particular transaction for individual income tax purposes.

In 2010, I signed a lease-purchase on my house. The tenant/buyer paid a nonrefundable binder, which I received in 2010, that was to be credited to the purchase price when we close in 2011.

Also, a portion of each of the rental payments I received in 2010 was also to be credited to the purchase price at closing.

1. Is the binder income in 2010? If so, is it ordinary income or capital gain? This is a house I have owned as a personal residence for over 5 years.

2. Is the portion of the rental payments that are to be credited to the purchase price income in 2010? If so, what kind?

Not sure if this part matters: the tenant/buyer DID sign a real estate purchase agreement, although it has the usual financing contingencies.

Part B -

What happens if the tenant/buyer does not close in 2011? I assume the binder and rental payment credits would then become ordinary income. If so, for what year?

Thanks!

[Dawgpix]

If you get a CPA to answer your inquiry on BB&B at this time of the year . . . I don't know if I'd trust it.





PS--I need to know the same answers.:icon_wink:

[Guisslapp]

My current theory (and I am not qualified to give tax advice, so the following should not be construed as tax advice).

Neither the binder nor the rental payment portions attributable to purchase are income in 2010. Even though the deposit is nonrefundable, I would still owe it to the buyer if I were to breach the contract (e.g., sale the home to someone else). Thus, in 2010 I did not have an unconditional, irrevocable right to keep the money.

In 2011, if the deal closes, the money will be capital gain income, but will be excluded under 26 U.S.C. 121 as a gain from a sale of personal residence (because all other requirements are met, e.g., principle residence for a period equaling 2 of the last 5 years, the gain is beneath the 121 limitation).

In 2011, if the deal does not close it will be ordinary income.

[Guisslapp]

Bump.

[Dwayne From Minden]

My current theory (and I am not qualified to give tax advice, so the following should not be construed as tax advice).

Neither the binder nor the rental payment portions attributable to purchase are income in 2010. Even though the deposit is nonrefundable, I would still owe it to the buyer if I were to breach the contract (e.g., sale the home to someone else). Thus, in 2010 I did not have an unconditional, irrevocable right to keep the money.

In 2011, if the deal closes, the money will be capital gain income, but will be excluded under 26 U.S.C. 121 as a gain from a sale of personal residence (because all other requirements are met, e.g., principle residence for a period equaling 2 of the last 5 years, the gain is beneath the 121 limitation).

In 2011, if the deal does not close it will be ordinary income.

Based on my limited knowledge (since I'm a gvt employee now) I think you are correct in this assumption -

And if it closes in 2011, the only portion that would be taxable is the implied interest portion off of the rental payments assuming it is an installment sale -

[Houston Techsan]

Here's my take:

All the money that goes to the purchase of the house should be excluded under the sale of a residence if the sale qualifies -- do not treat the property as income producing rental property by depreciating it, etc. I would file in the year sold.

All the the money that goes for rent is ordinary income and should be reported in the year received.

If the sale falls through, then all of the money received is ordinary income. If some of the money not counted as rent was in an earlier year than filed you could just file an amended return to include the extra.

That's what I believe you have said.

My real advice is to see an accountant. I use one even though I could do my taxes easily myself. It's just good to have a tax accountant's signature on the return.

[dhussdawg]

My current theory (and I am not qualified to give tax advice, so the following should not be construed as tax advice).

Neither the binder nor the rental payment portions attributable to purchase are income in 2010. Even though the deposit is nonrefundable, I would still owe it to the buyer if I were to breach the contract (e.g., sale the home to someone else). Thus, in 2010 I did not have an unconditional, irrevocable right to keep the money.

In 2011, if the deal closes, the money will be capital gain income, but will be excluded under 26 U.S.C. 121 as a gain from a sale of personal residence (because all other requirements are met, e.g., principle residence for a period equaling 2 of the last 5 years, the gain is beneath the 121 limitation).

In 2011, if the deal does not close it will be ordinary income.

Your theory makes great sense to me, but I wont promise that it is the tax code.