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Cost basis and reporting of real estate transactions.

Hypothetical ...

Adam buys a house for $400k and rents it to Bill. They sign a two year lease.

Eighteen months later, Adam needs some cash so he wants to sell, but Adam is locked into a lease with Bill for another six months. Charlie wants to buy the house for $425k, but doesn't want to deal with tenants. Adam sells Charlie a $390k, eight-month option to purchase the house for $35k.

Everybody's happy. Adam has $35k he needs to buy that new car. When Charlie exercises his option after the tenant has moved out, the effective purchase price will be $425k ($390k + $35k).

Question 1: What purchase price will be reported to the IRS? Is the $35k option part of the sales price, or does it reduce the cost basis?

Question 2: If Charlie changes his mind and does not exercise his option, how is the $35k option price handled? Does it reduce Adan's cost basis when (and if) he eventually does sell the property?

Reply to
NadCixelsyd
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Does it matter? It doesn't affect the basis for depreciation. (The answer is that it is part of the sale price, per analogy with stock options.)

Analogy with stock options suggests that it is a short-term capital gain. The analogy may be faulty. However, it does look like a gain, rather than a reduction of basis. Perhaps it qualifies as rental income, instead?

Reply to
Arthur Rubin

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