A few years ago, I wrote an article regarding lease options, and it caused quite a bit of fanfare. Due to numerous hits, we feel it’s time for a refresher as well as to dive into a little more detail. The structuring of lease options needs to be scrutinized to ensure that the IRS does not arrive and re-characterize the lease option as a sale.
The new rules for partnership audits enacted by the Bipartisan Budget Act of 2015 ("BBA") will dramatically impact not only how tax adjustments are assessed, but who is responsible for them. These rules will go in effect for partnership tax years beginning after December 31, 2017. We advise you to discuss with your legal counsel, so that your agreements include the new elections and address the updated regulations summarized below.
Some people are drawn into the real estate game largely for the potential tax benefits—done right, for example, you can leverage any real estate losses you sustain into some generous deductions for business expenses. There’s a catch, though: You can’t be engaged in your real estate activities just to generate losses. If the IRS finds that you lack a profit motive, it will limit and perhaps disallow your deductions altogether. One taxpayer recently learned that the hard way.
Lease options are often used in real estate transactions, especially when property owners run into difficulty finding a buyer. If you’re not careful, though, the IRS might recharacterize the arrangement as a sale in the form of a contract for deed.
Topics: Real Estate
If you own a business, it’s likely your biggest investment, so thinking about long-term considerations, such as your exit strategy, is critical as well. And if you’re an executive, you likely have to think about not only the company’s taxes, but also tax considerations related to compensation you receive beyond salary and bonuses, such as stock options. Planning for executive comp involves not only a variety of special rules but also several types of taxes — including ordinary income taxes, capital gains taxes, the NIIT and employment taxes.