On a lease option, what are the tax implications for the option credit?
For example: If the “option fee” was $5,000 down and the monthly lease payment was $1800/mo and $300 of that was credited toward principle reduction, how is that initial $5,000 treated as well as the $300/mo treated as far as taxes go for the seller/“optionor”?
Thanks in advance.
If the option is exercised, then the option consideration is part of the purchase price and the rent credit given is the same as a seller concession. It all gets lumped together as adjustments to the net profit.
If the option expires, the forfeited option consideration becomes ordinary income. The rent credit (that was not given) was already collected as rent, and rent is taxed as ordinary income.