Donald J. Valachi, CCIM, CPA, is an Associate Professor of the Real Estate Clinic at the University of Southern California. For 15 years, he has been a real estate investor and broker. Example 1: Grant the option. Susan buys a two-year option to buy John`s small building for $500,000. Susan will pay John $15,000 for the option. The payment of the $15,000 option will not have immediate tax consequences for Susan (the option) or John (the option). Receiving consideration of the option is considered a tax-free open transaction. The transaction remains open until Susan executes the option or expires.

Example 2: exercise of the option. Six months later, Susan had the option to purchase the building for $500,000. Susan`s tax base for the property is 515,000 USD (500,000 USD – 15,000 USD). John`s sale is also $515,000. Example 3: Selling the option on a gain. Instead of buying the building, Susan decided to sell the option for $20,000 after a year. As the apartment would have been US$1231 if Susan had acquired it, he reported a profit of $1231 ($20,000 to $15,000). Susan`s sale of the option has no tax implications for John. Example 4: Sale of the option at a loss.

Suppose in example 3 that Susan sold the option for $10,000 instead of $20,000. Susan reports a loss of $1,231 $US for $5,000 ($10,000 to $15,000). Again, the sale has no tax implications for John. Example 5: The option has expired. Instead of selling the option, after two years, Susan does not make the option in the exercise and it expires. Since the apartment would have been owned by US$1231 if Susan had acquired it, the payment of a $15,000 option will be considered a loss of $1231. John declares the payment of $15,000 as normal taxable income in the year the option expired. In light of the above and in conjunction with other discussions on the accounting of call options, the Boards have provisionally confirmed the Staff`s recommendation not to include the guidelines for distinguishing between a lease and a purchase into the final standard. A lease agreement should be recorded according to the rental standard and contracts that constitute the purchase or sale of an asset without a base should be accounted for in accordance with other applicable standards. B (for example, the realization of income by landlords, real estate, equipment and equipment by takers). However, boards of directors have recommended that the definition of a lease be continued, while public relations should include the corresponding definition of a lease. In addition, the assessment of the lease assessment as a point-to-time assessment should be conducted as opposed to a prospective assessment.

In the future, investment risk will not focus on a tenant`s likelihood of insolvency within 12 to 18 months, which is the general time frame for a business loan. The concern is what is the probability of the lease being executed over its lifetime, which can be 10 years or more.