We received a $5000 down payment for our $200,000 home. We have a lease purchase contact for 18 months. 20% of the monthly lease payment with go toward the purchase price. Is all of the money received considered income inasfar as taxes are concerned. This was our primary residence and we do intend to purchase another home after closing.
What happens to the $5,000 down payment and 20% of monthly lease payments if at the end of 18 months the purchaser/tenant is unable to complete the deal?
MTW
We keep it. That's what makes us feel confident that the deal will go through. In fact the 'buyers' have the current responsibility of upkeep. They would have bought the house outright but their loan will be VA and they needed time to have verifyable income. This deal is giving them that time.
If what you've got is a "lease with OPTION to buy," the normal rule as I understand it is that the seller is taxed as a rental until such time as the option is exercised, and then as a sale thereafter.
But it sounds to me like what you've got is a "contract sale" with a requirement to cash-out within the stated time frame. In that case it would be taxed as a sale from the beginning, and the monthly payments (at least the 80% portion) would be treated as taxable "interest."
You probably need to have a real estate attorney in your state look at the deal and decide which of the above scenarios applies. That outcome might vary depending on applicable state law. There might also be issues related to local real estate transfer taxes, recording requirements, etc.
But in either case you would have something that is currently taxable, whether it's "rent" or "interest," even though the sale itself may qualify for the sale of principal residence exclusion.
MTW
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