My client purchased a single family residence in 2015. This property has been available for rent since 2015. However, in 2018 the tenants in the home exercised the option to buy the home. A contract of sale was made in 2018 where the tenants are paying the seller $600/ month until March 1, 2020. Then the remaining balance will be due in full on April 1, 2020. As of January 2020 the property still remains with the original owners name and the original owner continues to make the mortgage payments. I have understood this would be considered an installment sale. Is that correct? For the owners 2018 tax return, do I report this as an installment sale or on Sch E? For the owners 2019 tax return, do I report it on Sch E or continue reporting the installment sale?
Tenants usually walk away from options because the grass is always greener in a place where they haven't lived. Is $600 a month any more than the rent they were paying? The owner doesn't want to risk the time and expense of foreclosure if the "buyers" move out. And they're just now getting around to filing a 2018 return?
I would at least wait to see what happens next week.
IRS Pub 527 says (somewhat vaguely)
Lease with option to buy. If the rental agreement gives your tenant the right to buy your rental property, the payments you receive under the agreement generally are rental income. If your tenant exercises the right to buy the property, the payments you receive for the period after the date of sale are considered part of the
We need to see the contract. This is not an installment sale yet. Purchase and sale should be reviewed by the attorney. In very simple terms. Sale Price = (selling price of property less rent received). Perfect option for those buying or selling real estate.