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jemmett
New Member

How to handle a leaseback on a new home purchase

I purchased my first home in April.  We did a leaseback to the current owner for 5 months.  I am trying to figure out how to treat this.  I suppose it is a rental property for 5 months.  How do I deal with the tax deductions for both rental and home property?
13 Replies
Carl
Level 15

How to handle a leaseback on a new home purchase

This may be easier than you or I think. After the 5 month leaseback, did the house become your primary residence?
jemmett
New Member

How to handle a leaseback on a new home purchase

yes.  

my confusion is mainly about how to appropriately apply taxes for the rental and primary residence.
Carl
Level 15

How to handle a leaseback on a new home purchase

If the property became your primary residence after a leaseback of less than one year, then depreciation is not to be taken by you, and of course, you can't claim any rental expenses. What you have is referred to as a SILO (Sale In Lease Out) Besides, for 5 months I seriously doubt you have enough rental expenses to make a difference on your taxes anyway. You just need to report and pay taxes on the income. I've looked all over and for the life of me I just can't seem to find on the IRS site where it clarifies if this subtracts from your cost-basis or reduces your sales expenses, or whatever. Hey @TaxGuyBill HELP! You assisted me with this last year, and I can't find it!
jemmett
New Member

How to handle a leaseback on a new home purchase

Thanks for all your help.  Hopefully we will get to the bottom of this as I am sure I am not the first or last person to have this situation.  Another question I have now that I have done some more research is concerning the home sale exclusion when I ultimately sell the home.  I plan on staying in this home for at least 7 years if not longer.  If I consider this a rental property for those few months during the leaseback, I will be penalized in the future when i go to sell my house and I Will not be able to claim the full 500k home sale exclusion.... I think.  This is all new to me.  It sounds like you are saying I do not have to classify this as a rental anyway.   Hopefully @TaxGuyBill can help!
Carl
Level 15

How to handle a leaseback on a new home purchase

The home sale exclusion in plain English, basically is this. If you live in the home as your primary residence for at least 2 of the last 5 years you own it (counting back from the closing date on the HUD-1, that's 730 days of the last 1821 days you owned it) then you qualify for a capital gains tax exclusion of $250,000 if single. If jointly owned and sold, then it's $500,000.
Note that the time lived in it does not have to be consecutive days either. You can live in it for 12 months, rent it out for 36 months, move back into it for 12 more months and if you've owned it at least five years, you're good to go.
jemmett
New Member

How to handle a leaseback on a new home purchase

ok.  Sounds good.  I'll wait for a reply on the leaseback stuff...
TaxGuyBill
Level 9

How to handle a leaseback on a new home purchase

I don't know much about leasebacks, but I would think it would be treated as any other rental property.  Offhand, I can't think of why it would be treated differently.

If that is the case, you would report the income and expenses for those 5 months on Schedule E.  As Carl said, don't bother entering the house as an "asset" because you can't take depreciation if it is "placed in service" and taken out of service as a rental property in the same calendar year.  As for how to enter the rest of the expenses into TurboTax, Carl is the expert.

However, the Home Sale Exclusion would be reduced.  @Carl :  The rental period would be considered "nonqualified use" because it was used for personal purposes after the rental period after 2008.

For simplicity let's say you had rented it out for exactly 6 months, and then used it as your principal residence for exactly 9.5 years, for a total ownership of exactly 10 years (the actual calculation uses days).  In that scenario, 95% of the gain would be excluded (9.5 years divided by 10 years).  So if you had a profit of $100,000, your Home Sale Exclusion would be 95% of that ($95,000) and you would owe long-term capital gains on $5,000 (taxed at 0%-20%, but it could affect other things on your tax return, especially if you have high income).
jemmett
New Member

How to handle a leaseback on a new home purchase

Thanks for all the feedback.
Carl
Level 15

How to handle a leaseback on a new home purchase

Actually, I'm still researching it. Just give me time.
Carl
Level 15

How to handle a leaseback on a new home purchase

Okay I found it, but based on information in multiple places.  From what I see, for rental purposes of claiming things on SCH E, you can't because this is what the IRS classifies as a disqualified leaseback - it was less than one year and it's not what is commonly called a "rent to own" arrangement. I also assume this leaseback was a part of the sales contract, be it in the actual sales contract itself, or an addendum to same.
Additionally, the seller did not "relinquish control" of the property to the buyer, during the leaseback period. For example, the buyer could not go in during the leaseback period and start doing things like knocking out walls, remodeling the kitchen, transfer or cutoff utilities, etc. With all this being true, the income received can be either subtracted from the cost-basis, or what's simpler is to declare the income as passive income - but not on the SCH E.
To declare the income so it's taxed as the passive income it is without dealing with all the nonsense of the SCH E for this, do the following:
Under the Personal Income tab scroll all the way to the bottom and elect to start/update Miscellaneous Income, 1099-A, 1099-C.
Select "Income from renting out personal property"
Enter the rental income you received for the entire leaseback period. If you incurred any expenses during that period, you can claim it. But I seriously doubt you have any expenses that you can claim on this screen. Just continue.
Then click Continue again, and that does it.
zhongjp058
New Member

How to handle a leaseback on a new home purchase

Can you share the IRS reference for option "subtracted from the cost-basis"? Searched around Publication 527 Residential Rental Property and only see the option to declare it as Other Income on Line 21 of Form 1040 (Not for profit).
Carl
Level 15

How to handle a leaseback on a new home purchase

@zhongjp058 Please start a new thread, as this one is over 2 years old and laws have changed since 2015.
zhongjp058
New Member

How to handle a leaseback on a new home purchase

@Carl Sorry and thank you. Got the answer. See this post: <a rel="nofollow" target="_blank" href="https://ttlc.intuit.com/questions/3383082-rent-back-post-settlement-occupancy-agreement">https://ttl...>
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