PAYING TAXES
Three part question -think I know the answer to these just not sure 1)If I buy my house for $160k then sell it for $200k - according to the IRS home sale exclusion rule as long as I reside in the residence 2 of the last 5yrs I dont have to pay any tax on the $40k (I get to keep it all) is this correct? 2)when I pay a down payment (ie. $10,000)to a seller(purchase) are there any tax benefits to me on this that I can claim? 3) when I collect a down payment from my buyer are there any tax benefits or disadvantages to me?
Quote:1)If I buy my house for $160k then sell it for $200k - according to the IRS home sale exclusion rule as long as I reside in the residence 2 of the last 5yrs I dont have to pay any tax on the $40k (I get to keep it all) is this correct? Yes, provided you both OWN and OCCUPY the house as your primary residence at least two of the five years prior to sale, your profit, up to $250K per taxpayer, is tax free.
Quote:2)when I pay a down payment (ie. $10,000)to a seller(purchase) are there any tax benefits to me on this that I can claim?A down payment is a refundable deposit. It is not a deductible expense. Instead, it becomes part of your cost of purchase and your cost basis in the property.
Quote: 3) when I collect a down payment from my buyer are there any tax benefits or disadvantages to me?A down payment is a refundable deposit. It is not income to you. Instead, it is included in the proceeds of the sale and is rolled into your taxable profit.
Thanks NewKidinTown2
Quote:When is the option consideration money taxable? From what I am reading, it appears it is either when the option is exercised OR when it expires. Do we all agree this is the case? If so, I am getting money for up to a year that I can defer taxes on. Correct?Yes, this is correct.
Quote:IS this capital gains tax? Since I don't ever own the property, I just CONTROL the property, does this make any difference?No, engaged in an active income business and all your income is ordinary income. It is taxable income when it is realized.
Quote:Am I required to pay self-employment taxes on this?Yes, if you are acting as a sole proprietor, you are self-employed in your active income business. Your income is taxed as ordinary income and you also have to pay the social security and medicare taxes on your self-employment income, just as social security and medicare withholdings are deducted from your salary. A business entity, may change the taxation landscape, but the income earned by your business is still ordinary income to the business.
Quote:As far as the back-end profit I obtain if/when the tenant-buyer exercises the option, is this looked at any differently than the option consideration money? Obviously it is taxed as incurred but is it taxed differently?Until the tenant-buyer exercises the option, there is no back end profit. When the option is exercised, the backend profit and the option consideration received are lumped together as part of your net profit calculation. Your net profit is taxed as ordinary income.
Quote:What is the best way of organizing my business so I can minimize my tax exposure - especially on lease options, since this is my focus. Consult a licensed tax advisor, a CPA, and an estate planner. All of these professionals should have input to your selection of a business entity. There is not a blanket correct answer to your question. The best entity for me, may not be the best entity for you.
NewKidinTown2, thanks for the reply. It was exactly what I was looking for. One final question for you. Does the deferred aspect of taxation for the option consideration typically apply to (1) State income Taxes (I suspect it probably differs by state?) and (2) Self-employment taxes?
Thanks in advance,
Scott
Great advice. I would just add that option consideration also becomes taxable upon default.
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