I am new to the game and just getting started. I have 4 properties, 2 are setup under Land Contracts, one is a Lease with Option to Buy, and the 4th. we just closed on and will also be a Lease 2 Own.
My question is about giiving a rent credit i.e. applying a portion of each months rent towards the down payment. Is this something that you seasoned vets do? Or would you not recommend it? My CPA said I should not offer this as it could cause tax implications. I have read articles where the author uses and recommends this strtagey.
I live in Pa. if that makes any difference.
Your accountant seems more confused than you. I doubt he has ever done a lease option.
Rent credits are used all the time with lease options. They are a great marketing tool and a way to make the phone ring. No small concern in today’s market.
There are always tax implications to any income you receive. I think your CPA was saying that rent credits add a little more complexity to your accounting and to your tax return.
Not that it can’t be worked out. The simplest thing to do is to treat all rent as taxable rental income and pay the appropriate taxes for the year it is received. When the buyer exercises the option to purchase, any rent credits earned become a seller concession which reduces your taxable sale profit.
I suppose that if you want to be technically correct, you would accrue rent credits as additional paid in deposit to be credited to the buyer at settlement when the option is exercised. Deposits are not income until the property is sold or forfeited when the option expires. If the option expires, then the accrued rent credits become additional rental income for the year in which the option expires.
In the end all income is eventually taxed at your ordinary income tax rate and the SE income taxes are paid regardless of the accounting method you use.
That said, I would not give a rent credit if the tenant/buyer is paying market rent. I would only consider the amount that exceeds market rent subject to negotiation as a rent credit.