How Income from the Sale of Real Estate Options is Treated for Tax Purposes

Income earned from the sale of real estate options is taxed at the same rate as ordinary earned income. And for tax purposes, the IRS will consider you to be a real estate dealer versus an investor because you are buying options with the intent to resell and not as an investment. Real estate options are covered in Section 1234 of the Internal Revenue Code, which is provided for your convenience:

Internal Revenue Code, Section 1234, Options to Buy or Sell

1234(a)(1) GENERAL RULE.—Gain or loss attributable to the sale or exchange of, or loss attributable to failure to exercise, an option to buy or sell property shall be considered gain or loss from the sale or exchange of property which has the same character as the property to which the option relates has in the hands of the taxpayer (or would have in the hands of the taxpayer if acquired by him).

1234(a)(2) SPECIAL RULE FOR LOSS ATTRIBUTABLE TO FAILURE TO EXERCISE OPTION.—For purposes of paragraph (1), if loss is attributable to failure to exercise an option, the option shall be deemed to have been sold or exchanged on the day it expired.

1234(a)(3) NONAPPLICATION OF SUBSECTION.—This subsection shall not apply to—

1234(a)(3)(A) an option which constitutes property described in paragraph (1) of section 1221(a)

1234(a)(3)(B) in the case of gain attributable to the sale or exchange of an option, any income derived in connection with such option which, without regard to this subsection, is treated as other than gain from the sale or exchange of a capital asset; and

1234(a)(3)(C) a loss attributable to failure to exercise an option described in section 1233(c).

1234(b) TREATMENT OF GRANTOR OF OPTION IN THE CASE OF STOCK, SECURITIES, OR COMMODITIES.—

1234(b)(1) GENERAL RULE.—In the case of the grantor of the option, gain or loss from any closing transaction with respect to, and gain on lapse of, an option in property shall be treated as a gain or loss from the sale or exchange of a capital asset held not more than 1 year.

1234(b)(2) DEFINITIONS.—For purposes of this subsection—

1234(b)(2)(A) CLOSING TRANSACTION.—The term "closing transaction" means any termination of the taxpayer's obligation under an option in property other than through the exercise or lapse of the option.

1234(b)(2)(B) PROPERTY.—The term "property" means stocks and securities (including stocks and securities dealt with on a "when issued" basis), commodities, and commodity futures.

1234(b)(3) NONAPPLICATION OF SUBSECTION.—This subsection shall not apply to any option granted in the ordinary course of the taxpayer's trade or business of granting options.

1234(c) TREATMENT OF OPTIONS ON

1234(c)(2) TREATMENT OF CASH SETTLEMENT OPTIONS.

1234(c)(2)(A) IN GENERAL.—For purposes of subsections (a) and (b), a cash settlement option shall be treated as an option to buy or sell property.

1234(c)(2)(B) CASH SETTLEMENT OPTION.—For purposes of subparagraph (A), the term "cash settlement option" means any option which on exercise settles in (or could be settled in) cash or property other than the underlying property.

The Real Estate Profits

The Real Estate Profits

If You Are Someone Who Doesn't Want To Take A Share Of The Real Estate Pie, This Is Not For You. Do You Feel The Real Estate Market Is Where Your Heart Lies? Always Wanted To Be A Part Of It. But Were Super Confused And Didn't Know Where To Even Start? Looking For Someone To Hold Your Hand And Guide You? Fret Not.

Get My Free Ebook


Post a comment