In a lease purchase agreement where a portion of the rent is a deposit toward the purchase does the deposit portion have to be shown as taxable income in the yr received?

[daston4]

We have a lease purchase agreement the tenant is paying $1500/mo.  $1250 is rent and $250 is a deposit toward the purchase.  The purchase option can be exercised between the 25th and 48th month of the lease.  If the option is not exercised the $250/mo is forfeited.  Landlord did not want to purchase outright until he was sure he could make a go of it and landlord has a mortgage and can not transfer title so this is not meant to be a installment sale.

Is the $250 held as a deposit and recognized as income when the sale occurs or must it be recognized as income when received (cash basis business)

[JulieR · Accepted solution]

You will not recognize the deposits as income until the option to purchase is exercised or the tenant forfeits the deposit under the terms of the lease agreement.

Per the IRS: 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 are generally 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 selling price. source: http://www.irs.gov/publications/p527/ch01.html