Down payment on Installment agreement -rental

[taxgirl]

My client owns a rental and is selling it in 2015, lease to own. Client collected 10% deposit ($11,500) of course in December 2014. Not sure what to do with this

[Gretel]

That depends on the nature of the deposit. If it will be returned if sale doesn't happen than it is not income in 2014.

[taxgirl]

My client indicated, through correspondence, that the "deal" should be finalized by the end of March. I just sent her an email verifying that the agreement is still to happen and that the money is not going to be returned.

If that is the case, do I report the $11,500 as income on line 21 or on sch E?

[Roland Slugg]

If the "deal" has not yet been finalized, then the $10,500 must be refundable if it doesn't close. It sounds like a returnable "good faith" deposit, but without reading the documents, I can't say for sure.

[kathyc2]

Unless the contract says that taxpayer gets to keep 10K no matter what, which is highly unlikely, report the sale in 2015.

Reporting the 10K in 2014 as something other than part of the 6252 sale will mess up the regular income/capital income ratio which would likely result in client paying higher overall taxes.

[Burke]

I would think it is merely a down payment, and it is treated as "Earnest Money" kept in an escrow account. I would urge her to do just that -- i.e, keep it separate from other funds. Unlike an Option to Purchase, which can be forfeited if the deal does not go through, this sounds like it is returnable. If any part of it is kept because of failure to close, then that is ordinary income at that time (which would be in 2015.) When (if) the sale goes through, the $11,500 is part of the purchase price. You account for it on 4797 as you would normally on a sale of business property when you show the total sales price, less expenses, less basis, etc.

[taxea]

I agree with Burke with one exception.....shouldn't it be reported as an installment sale in 2015 and the portion that is rent on a Sch E?

[Burke]

OP mentioned "rent to own" but is it really rent? And the information regarding when the prospective buyer actually moved in and began occupying the house also was not given. If the "rent" is being applied to the purchase price, then it is not really rent. As Gretel says, it depends on the terms of the contract. Since it was a lump sum deposit, it does not sound like rent, which would be paid monthly until the sale is actually consummated.

[taxea]

Burke..exactly...usually a rent to own has a portion going to rent and a portion going to purchase. The contract details this, or should