Apartment Buyout

[RPC]

Have a client who has been renting an apartment. Landlord wants to convert the apartment to condo. Offered client $ to move out. Client accepted. How is income treated? Obviously no basis in apartment, so 100% income. Is it ordinary income or perhaps capital gain?

[jimmcg]

Capital gain results from the sale of a capital asset. Do not see a capital asset being sold here so sounds like ordinary income. Maybe some others can come up with a more innovative approach to this.

[dsi]

My reasoning follows JIMMCG, there isnn't a capital asset to trigger CG, therefore the income appears to be ordinary.

[Davc]

The client obviously had an asset or the landlord wouldn't be making the payment. An intangible asset was sold. Capital Gain.

[jimmcg]

I think everone would agree that an asset was sold. The question is how is it defined and is it a capital asset? Would be nice to know if there was a lease involved which would give rise to certain lessee lease rights?

[Luis Mopeo]

A capital asset is everything you own.

Except...

Capital assets are defined in a negative sense. See the list on page 6-8 of TTB. I don't see anything resembling a lease interest.

Capital gain.

[RPC]

Found the following referrence. Looks like it may be capital gain.

TITLE 26--INTERNAL REVENUE

CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY
(CONTINUED)

PART 1_INCOME TAXES--Table of Contents

Sec. 1.1241-1 Cancellation of lease or distributor's agreement.

(a) In general. Section 1241 provides that proceeds received by
lessees or distributors from the cancellation of leases or of certain
distributorship agreements are considered as amounts received in
exchange therefor. Section 1241 applies to leases of both real and
personal property. Distributorship agreements to which section 1241
applies are described in paragraph (c) of this section. Section 1241 has
no application in determining whether or not a cancellation not
qualifying under that section is a sale or exchange. Further, section
1241 has no application in determining whether or not a lease or a
distributorship agreement is a capital asset, even though its
cancellation qualifies as an exchange under section 1241.

[JON]

It is a capital asset

and the gain should be treated as such.

[New York Enrolled Agent]

A good discussion of the law and cites in PLR 200045019

The headnote (Capitals added) reads as follows:

Payments landlord made to tenant in exchange for tenant's surrender of his lease after city housing agency determined that premises were subject to rent control law since beginning of tenancy qualified for CAPITAL GAINS treatment under Code Sec. 1241; , whether tenant's interest in premises are capital asset under Code Sec. 1221; or real property used in business under Code Sec. 1231; . One-year holding period was met, and fact that leasehold under rent control laws was for indefinite period wasn't material.

[Bees Knees]

Capital gain treatment under Section 1241 applies assuming it is for the surrender of a lease (a capital asset).

If there was no lease, there is no capital asset, and the gain does not get capital gain treatment.

For example, assume there is no lease and the landlord has the right to kick the person out on a month to month basis. But the landlord feels sorry for this tenant and wants to help him or her find a new place. Or, the landlord doesn't want the hassle of having to evict the tenant, which could take up to three months, or doesn't want the tenant to trash the place before leaving, etc. etc.

There are a number of reasons the landlord might have for offering money to a tenant who has no lease to leave the place as soon as possible, so the landlord can sell the place quickly. All of which would not get capital gain treatment.

[RPC]

Thank you for all your help..!!!!