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Lease Option vs. Installment Sale

IRS Guidelines

 

Rent 2 Own 
a San Diego Home

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IRS Guidelines classify a lease as an installment sales contract rather than a "tax lease" if it meets one or more of the following conditions:

* Portions of the rental payments are specifically applied to equity in the property.

* Title to the property will transfer to the lessee upon payment of the rental payments.

* The amount paid in rental payments over a relatively short period of time is an excessively large proportion of the total sum required to secure transfer of title to the property.

* The sum of the agreed-upon rental payments materially exceed the fair rental value of the property, indicating that payments include an element other than compensation for use of the property.

* The taxpayer can acquire title to the property under a purchase option price that is nominal in relation to the value of the property at the time the option may be exercised.

* Some portion of the rental payments is specifically designated or readily recognized as interest.

* The sum of the rental payments and purchase option approximates the original purchase price plus interest and carrying charges.

Businesses can deduct the full amount of their lease payments if all the above conditions are false. If one or more of the above conditions is true, the lease is considered to be an installment purchase, and the lessee will only be allowed to deduct a depreciation amount and the "interest" portion of the rental payment.