Positive equity from Lease sale considered Income?

Off-Ramp
41

Decade of experience with filing capital gains forms for lease buyouts? Decade of experience with IRS rulings on “closed end leases” (where is that in the tax code?)

This whole thread assumes you exercise and ultimately become an owner. You’re assuming payments made prior to holding ownership can’t possible impact cost basis and that’s manifestly not true. simplest example is layaway type programs with non-refundable installments and contract says no ownership until all payments made.

Uh that’s how you have equity, FMV=Third party purchase offer, FMV>buyout= equity.

Not that FASB matters at all for federal tax code, but if you want to bring it up under FASB a “closed-end” lease is not a type of lease: the only two types are operating or capital lease.

Anyways I’m done here, zero need to convince one particular poster otherwise, and won’t be replying further since I think I’ve been sufficiently clear here.

42

Yes ignorance is bliss & I am not replying to convince any one person, including you, but provide the community with enough information that they can make their own decisions.

You’ve been sufficiently clear with your opinions but have ignored everything backed up with verifiable source.

For, example # 1,

In this requirement of a capital lease, you completely ignored the key word(s) or phrase stating that “at a bargain price, for substantially less than fair market value”, thus buying at stated RV is not significantly less than FMV be or anywhere close to a bargain price.

Example #2,

Again mixing up totally different types of contracts (lease = rental contract v layaway = purchase contract).

"What Is Layaway?

Layaway is a purchasing method in which a consumer places a deposit on an item to “lay it away” for later pick-up when they are financially positioned to pay off the balance. Layaway also lets customers make smaller payments on the product until the purchase is paid in full. A layaway plan ensures the consumer will get their chosen merchandise once it’s fully paid."

For example # 3,

For your kind information, congress doesn’t always create rules for everytype of transactions, it relies on widely accepted accounting principles & provides specialized rules when necessary. There your assumption that FASB doesn’t matter for tax code is false.

Below text explaining capital lease is directly from the IRS website & manual, feel free to let me know if it reads or sounds familiar, also attaching link for reference,

"1.35.6.4.7** **(07-26-2016)

Assets Under Capital Leases

  1. The IRS accounts for capital leases according to SFFAS No. 5, Accounting for Liabilities of the Federal Government, and SFFAS No. 6, Accounting for Property, Plant, and Equipment.

  2. A lease is classified as a capital lease when the award line is equal to or greater than $50,000, the useful life of the asset is two or more years, and the lease meets at least one of the following criteria at inception:

  3. The lease transfers ownership of the personal property to the lessee by the end of the lease term.

  4. The lease contains an option to buy the leased property at a bargain price.

  5. The lease term is equal to or greater than 75 percent of the estimated useful life of the leased property.

  6. The Net Present Value (NPV) equals or exceeds 90 percent of the fair market value of the leased property."

Lastly,

I think the community understand what “industry” i am referring to.

Per the explanation of close end leases (referenced multiple times above), it clearly states that they are type of a rental agreement, thus you should reference the rent section in the IRC (Internal Revenue Code = the tax code).

And again, i am not replying to convince you or anyone else. I am just trying to provide enough information that can help someone to compare the other side of the thinking process & make their own decision as they see fit.

3 Likes
43

Who is talking about buying at RV here? All of these sales/purchases generating equity are being done prior to lease termination, where the RV isn’t relevant, and are being done at significantly less than FMV (which is the whole reason there is equity).

1 Like
44

That whole conversation & stated requirements is about “Capital Leases” & the poster ignoring the large part of the requirement in his or her response.

Also, the classification of a lease as a “Capital LEase” or a “Close-End/Rental Lease” is done at the time of the execution of the agreement not after the fact as clearly stated in the IRS requiremetns

So at the time of execution of the lease contract, the RV is the most reasonable FMV of the asset thus not fitting in to the critria required for a transaction to be consided a “Capital Lease”.

OR the IRS requirements,

45

Your quoting of FASB guidance on categorizing leases seems erroneous here.
FASB is the board that sets standards and practices for financial accounting not taxation. Rules on classifying certain leases as fixed assets as opposed to liabilities on an entities balance sheet has no bearing on how the IRS categorizes leases for tax purposes.

In regard to the matter at hand, here is an article I found discussing the treatment of purchase options in leases.

https://www.ccim.com/cire-magazine/articles/lease-option-or-installment-sale/

What seems most applicable to our auto leases is that the option price consistently gets reduced with each rent payment and that a portion of rent payments can be identified as market interest on loan. Both of these factors indicate an original sale and that the renter or lessee is acquiring equity with the lease payments.

1 Like
46

While i used the FASB guidance at that point was just to show what an actual capital lease transaction means, but if you see the post just above yours, I also quoted the IRS guidelines which read almost similar (wont say exact but it is pretty close).

Again, the discussion I was having with the poster was about difference between the types of leases.

I am happy to discuss the facts of the article & show how they are essentially referring to “Capital Lease” transaction & not a “Close-End Lease” transaction, but i think it might be an overkill.

47

Where are you getting that there is a difference between a capital lease or closed end lease with regards to sale classification?

48

if you go to earlier posts, there has been a detailed discussion about what scenarios can be considered depending how the transactions is structured.

However, the discussion is not about how to classify the “Sale Transaction” but about what is the true cost basis of the transaction and what can be included in determination of the cost basis but that is when one of the poster raised the issue of Capital Leases & Lay away agreements thus needing to provide clarifications about the requirements of such transactions.

1 Like
49

Wow…lot of discussion here. What’s the conclusion then? Does it need to be reported on tax return?

50

Talk to your local tax professional about your state’s laws.

1 Like
51

Yeah, probably would do that. But was wondering if anyone had any experience and know the answer already, especially for federal tax return

52

getting about that time of year and I’m my own tax professional lol

I’m curious if anyone received 1099s earlier this year for sales they made in 2021? Or what form they accounted for the sales with on federal returns

53

Received from who exactly?

54

The buying dealer, Carvana, etc - especially with new 1099 rules wasn’t sure if they were impacted by those changes

55

they aren’t due until Feb 1st, highly doubtful any company would send a 1099 before 1/1/23 on any 2022 transactions.

1 Like
56

Car dealers will be sending out 1099s when they buy cars from consumers? Oh so that’s where the 87K new armed IRS agents will be used :slight_smile: