Posted by Tokolos on September 13, 2005 at 15:17:06:
My option is protected by a recorded “Memorandum of Option Agreement.” It clouds the title. The strike price is substantially below the fair market value of the property prior to starting the improvements, so it seems safe enough to me. Plus, the current owner on title is an old friend. I think I can trust her.
I did not want to be on title to the property, nor on any loan docs. The option is a low profile way to accomplish the same ends.
When we sell the property, I will have a gain on my share of the property if I exercise the option and go on title to the property. But I think this is not smart taxwise. It would be short term capital gain.
It would be better to sell my option back to the current property owner at closing at a price that nets me the same proceeds. I just didn’t know if the last strategy would be a long term capital gain or not. I would have held the option for more than one year, so I thought it should be a LTCG, but I did not know if options were treated differently than other property for conputing the tax.
Posted by Tokolos on September 12, 2005 at 17:27:07:
I was wondering if someone could fill me in on how a straight option is treated for federal income taxation.
I have an option to buy on a property owned by someone else. We are making improvements to the property with the intention to sell the property at a profit. When we sell, I had planned on selling my option at closing to recover my costs and realize a profit.
If I have held the option for more than one year, how is this taxed? Is it long term capital gain because I held the option for more than one year?
If I excercise the option to buy, then immediately sell the property in a double or simultaneous closing, isn’t the gain treated differently? I mean, it would now be short term capital gain, wouldn’t it? Is this because the option holding period is no longer relevant, and the property holding period controls the tax treatment?
Is there a smarter sequence for tax treatment that still accomplishes the same thing?
I am not a CPA so don’t believe anything you read here. There are others with better infomation than me.
Let me get this straight, You are improving a property you don’t own-- A big NO NO
An option only says you can buy a property for a set price by certain date.
You have no long term or short term capital gains until you buy. The clock starts at the closing. If you own the property for 1 yr and 1 day irt is long term taxed at 15%. less than that it is ordinary income and taxed at your current rate.