Lease Buyout received by landlord

[jds24]

My commercial tenant wishes to vacate 3 years early and is offering a lump

sum payment. Is that payment ordinary income or capital gain?

[Anonymous_]

Ordinary income but may be amortizable.

See https://www.thetaxadviser.com/issues/2007/nov/leaseterminationpayments.html

[jds24]

I received the buyout and will amortize the payment for 2023. I am in the process of selling the property.   Is the unamortized portion of the termination payment treated as ordinary income in 2025. Can the unamortized 

amount be added to the purchase price and be paid as a capital gain?

This property was acquired through a 1031 exchange and has a low basis. The properties relinquished where 

from a different state. Do I have to pay tax to the state where this property is located when the gain did not occur there?

[RobertB4444]

No, the unamortized portion is regular income and needs to be treated as such.  Can't change it in to capital gains.

In general the state tax law follows along with federal tax law so that if you don't report it on your federal return you don't report it on your state return.  But there are some very notable exceptions that will bite you if you are not careful.  You don't list the states here so you need to do some research on how these two states handle 1031 exchanges.

@jds24