How to report a house leased to own.

[mikeburg]

I have a client who purchased a house for $55,000, spent 13,000 on improvements, and then made a lease to own agreement with a family who to purchase the house.
The written lease to own contract states that:
(1) "This contract is not a sale contract for the property"
(2) The purchase price of the property is $80,000
(3) The buyer will pay $791.09 per month for 10 years with
entire payments going toward the purchase of the property
(4) The buyer assumes all responsibilities of the property including
its insurance and property taxes.
(5) If buyer decides not to purchase the property then all monies
paid will be considered as rental payments and not refunded

The family buying the house is using it for their residence.

How should the payments be shown on the seller's 2016 tax return & each subsequent year for the next 9 years, as a sale, as a rental, or what?

I would appreciate any & all information you can give me on this. Thanks so very much. mikeburg

[TaxGuyBill]

Despite what the contract says, I think it is a sale (at least for tax purposes).

Because the purchase price is the current FMV (not the FMV in 10 years) and the "buyer" is assuming insurance and property taxes, that seems to indicate a sale.

Unless the home qualifies for the $250,000/$500,000 exclusion, you probably want to treat it as an Installment Sale.


Although the contract says "entire payments going toward the purchase of the property", that doesn't seem to be the case. It DOES have interest built-in to it. Ten years of payments would be a total of $94,930.80. If I'm doing my math right, that works out to be exactly a 3.5% interest rate (which also supports that it is sale, not a lease).

So you will need to create an amortization schedule to determine how much interest to report each year, and how much principal was paid each year to report the Installment Sale.

[Roland Slugg]

Yep, it's a sale all right ... with interest at 3.5% included in the payments, fully amortized over 10 years.

Regardless of whether the gain qualifies for the §121 exclusion, the interest should be reported on the seller's tax return each year.

Why don't the buyers and sellers simply record the sale now, taking back a deed of trust as security?

[Burke]

Agree. It's a sale in spite of the wording in the contract. One of the rules of valid contracts is that it cannot be contrary to the law.

[Super Mom]

but I understand this as an installment sale. Gain and interest is taxed when received. The only installment sale I have done was for an LLC so not sure of the form number on personal, but surely there must be one.

[Burke]

From the info in the OP, it appears that this was possibly a flip. It doesn't say the client ever lived there, but bought it, improved it and then sold it. So you are looking at potential Sche C and SE taxes as well.

[mikeburg]

Thank you.

Many thanks. I thought maybe since the legal title has not transferred at the title office, it could not be reported as a sale.

However, I do see your points.

The taxpayer purchased the house, fixed it up for 3 or 4 months & did a sale to their niece & her husband with no down payment to help them get started owning a home. The home is being sold at fair market value, so no issue there.

Yes the payments do include interest & I have a copy of the loan amortization schedule.

Barring any other ideas, I will treat the house as an installment sale.

People who buy houses & flip them have to file schedule C's & SE's on the gains?

Thanks so very much.

mikeburg

[TaxGuyBill]

People who buy houses & flip them have to file schedule C's & SE's on the gains?

If it was a one-time thing, no.

If it is done regularly, yes. It would be a business.

[mikeburg]

Yes, one time only.

yes, one time only.

thank you Mikeburg

[Burke]

There are many opinions on flipping houses and possibly some court cases as well, so it is confusing. If you wish to research this board, there are many past posts on it. The fact that this was done once for a family member may have some bearing on not treating it as a business. And of course, if he bought it, improved it, and sold it and there was no profit, then you wouldn't have a gain to begin with.....