How do I report income from an apartment lease buyout?

[ToddL]

It depends on if the lessor reported the income to you and, if so, how? Did you get a Form 1099-MISC?

[josh3]

I got a 1099 misc.

[rjanush]

what if there is no 1099 Misc?

[ToddL]

Enter the lease buy-out as follows in the 1099-MISC interview:

• Enter the 1099-Misc in the Other Common Income section (Enter "1099misc" in the Search Box and Select "Jump to 1099misc")
• For "Description", enter "Lease Buy-out Pmt"
• Also check that it does not involve work like your main job, that it did not involve an intent to make money, and is not a recurring payment (received in the past or expected in the future) (these questions only apply to active, not passive, income).
• The income will be reported on line 21 of your return.

[groundhogmule]

Answer is ambiguous re: "did not involve an intent to make money". Does this refer to intent by OWNER or intent by RENTER?  Which is it?   (If owner intends to sell for profit -- or for more than if renter did not accept buyout -- then buyout represents "an intent to make money"on owner's part.)

[rjbrady78]

I never got a 1099 so I forgot to report it on my 2019 taxes. I'm suddenly remembering and worried. I don't even know who would report it, the company seemed to be an LIC within an LIC within an LIC...What should I do?

[VictoriaD75]

Was the income related to subcontractor work that would require you to create a Schedule C for a business? Do you have expenses to deduct against this income? 

You still need to report income. If you received more than $600, you should be issued a 1099-MISC. If not, you will not receive the document, but you still need to report the income. Please note, this will require you to pay self-employment taxes, which are Social Security and Medicare taxes, on this income.

Follow these steps if you have a 1099-MISC:

• Under the Federal menu, click on Wages & Income
• Expand the menu for Other Common Income
• Click Start/Revisit next to Form 1099-MISC
• Enter the information as shown on your document

If you did not receive a 1099-MISC:

• Under the Federal menu, click on Wages & Income
• Expand the menu for Less Common Income
• Click Start/Revisit next to Miscellaneous Income, 1099-A, 1099-C
• Click Start/Revisit next to the first option, Other income not already reported on a Form W-2 or Form 1099
• Answer Yes to the question, Did you receive other wages?
• Continue through the screens until you get to Any Other Earned Income
• Answer Yes to the question, Did you earn any other wages?
• On the next screen, choose Employee compensation that was not reported on a W-2
• Enter the information on the screens that follow

You will now need to amend your return to include this income. Follow the steps below:

1. Log into your TurboTax account
2. Choose the tax year that you wish to amend
3. Click Amend
4. Make any necessary changes

Keep in mind that when you are amending, the refund tracker monitors the difference from your original filing to the amended return. It does not include any original refund or balance due. If you are claiming any previously unclaimed income, you may see the difference as an additional balance due. 

[mbmast]

Your statement "Please note, this will require you to pay self-employment taxes, which are Social Security and Medicare taxes, on this income" seems to contradict IRS Publication 544 (https://www.irs.gov/pub/irs-pdf/p544.pdf), which states "Payments received by a tenant for the cancellation of a lease are treated as an amount realized from the sale of property."  A sale of property would be a capital gain (or loss) and therefore, not ordinary income, right?

[DianeW777]

@mbmast Yes, in regards to your question about the sale of the property.  If it was a rental activity, and it was sold, there would be taxable gain.  The amount of gain up to the amount of depreciation claimed would be subject to a maximum rate of 25%, while any excess gain if applicable, would receive the lower 0% - 20% depending on income level, if the holding period was greater than one year. If the holding period was one year or less then the gain would be subject to the ordinary tax rate which is based on income and regular tax rates.

For clarification, the answer provided in 2020, was not responding to the original question about an apartment lease buyout which was asked in 2019. 

The answer you provided would apply to a lease buyout question only. IRS Publication 544, which states "Payments received by a tenant for the cancellation of a lease are treated as an amount realized from the sale of property." 

[mbmast]

@DianeW777  We may be misunderstanding each other.  If a tenant in a rent controlled  apartment building accepts an offer to move out so that the landlord can renovate and re-lease, to someone else, at a higher monthly rent, the tenant that vacated may claim that buyout amount as Other Income, not Ordinary Income, correct?  In other words, the tenant should receive a 1099-MISC with the buyout amount in box 3 (not box 7) and the tenant should report this income on form 1040, line 21 as Other Income.  Is this correct?

I am basing my understanding of this on two IRS publications:

1.  Publication 544 (https://www.irs.gov/publications/p544),

2.  Volunteer Tax Alert 2011- 08 March 4, 2011 (https://www.irs.gov/pub/irs-utl/VTA_2011-08_Cash_for_Keys_Program.pdf)

[DianeW777]

@mbmast Yes, you are correct. It would be considered 'Other Income' and it is ordinary income. In other words it would be taxed at the rate determined based on all income for a particular taxpayer. It would not be considered as capital gain income.

Yes, you are correct about how it is handled and on the new Forms 1040, it would show up on Schedule 1, Line 8z, which would carry to Form 1040, Line 8.  

It's difficult to keep up with the line numbers when they had the same ones for so many years.

[mbmast]

@DianeW777  To be clear, it would not be subject to Social Security, SSI, correct?  And thanks very much in advance for your help.  I would have thought that simply Googling "tenant lease buyout" and "tax consequences" would have immediately produced clear answers to my question, but no...

[DaveF1006]

No, it will not be subject to FICA taxes such as Social Security and Medicare taxes.