Options:
1. In an option purchase K, the option grantor (the payment receiver) nor the option holder (the payment maker) experiences any resulting tax consequences at the time the option is purchased. The grantor generally defers income until either the option holder exercises the option or allows it to lapse, whichever comes first.
2. Straight Options
a. The 4th circuit in Va. Fe & Coal & Coke v. Commissioner, the rule that straight option payments are taxable in the year the optionee surrenders (or exercises) all rights under the option contract and not in the year the option payment is actual received.
3. Lease/Option
a. Basically, in a lease/option, the option represents a larger piece of the economic contribution to the sale of the property, than does a straight option. Especially, when the optionee gets to use the property during the time the option is commenced. In these situations if the option is exercised, the option amount usually represents the purchase amount and the seller has effectively deferred taxable income for the period of the lease option. (Ktchin v. Commissioner (1965)),
b. These are then rightfully characterized as rental income.
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