option taxes

I am thinking about selling options on some lots I own. What are the tax implications on the money received for the option.

Money you receive for the option becomes taxable income in the tax year in which either

  • the option expires, or,
  • the option is exercised

Thanks Dave. To carry this one step further. When the option is exercised, can the money received for the sale be used in a 1031 exchange?

As a general rule, No. The money is already in your hands, you have constructive receipt.

This question may be moot. If the lease option is a technique to facilitate flipping property, then the property would not qualify to participate in a 1031 exchange in the first place.

After re-reading your original post, I believe I answered your question a little too quickly.

You say you already own the lots. The question we need to first ask is when and why did you acquire them? If you have been holding the lots for some time as investments, anticipating future appreciation, then the answer is YES – when the option is exercised, the lots can be the relinquished property in a properly structured 1031 exchange.

However, any money you have already received as option consideration is excluded from the exchange and is taxable in the year the option is exercised.

If the property was acquired to flip and the option is simply a technique to facilitate the sale, then the property is not eligible to participate in a 1031 exchange.