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Rental Purchase - Indefinite terms

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    Rental Purchase - Indefinite terms

    I don't think we'll find the answer to this in TTB, or maybe anywhere else...

    Terms of this bizarre arrangement: Buyer can pay $500,000 before 12/31/16. However, the parties are amenable to an arrangement as follows:

    a) Buyer pays NOTHING, but begins paying rent at $2500 per month, $30,000 per year until property closes.
    b) Property closes at a time of seller's own choosing but in no instance not to exceed 10 years from 12/31/16.
    c) Buyer guarantees 4% inflation escalation per year above the $500,000 until transfer of property is consummated.
    In other words, if property closes in 5 years, $20,000 X 5 = $100,000 added for total settlement of $600,000.

    Most of know the IRS will not allow a sale of property to be disguised as rent. Discounted cash flow would determine the selling price and there would be interest to be reported in every year.

    The IRS preference for such an installment sale sounds fundamentally correct until you try to apply the numbers. Note condition #b) above, the seller can pick a year of his own choosing, thus making the total money received over the term unknown.

    My question: Does the "unknown" factor create a reporting situation where RENT is reported instead of principle/interest on the installment method?

    Don't know whether it makes any difference, but the buyer is a tax-exempt educational institution desiring to expand their property borders, so above amounts are somewhat in excess of FMV. Buyer also has an option to walk away with no further obligation at any time before consummation if the housing market suffers a calamity.

    #2
    Originally posted by Snaggletooth
    My question: Does the "unknown" factor create a reporting situation where RENT is reported instead of principle/interest on the installment method?
    Options by their very nature contain an “unknown” factor, and in any case the transaction you described would not be reported as a sale (by the owner) or a purchase (by the tenant) at all. That wouldn’t happen until such time as the option was exercised and title transferred to the buyer. Until that time the arrangement is simply a lease, and the payments made from the tenant to the owner would be rent, either in their entirety or in large part.
    Roland Slugg
    "I do what I can."

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