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Posted by Nick on March 30, 2001 at 17:48:26:

In Reply to: Money to Vacate posted by Sue on March 12, 2001 at 13:48:46:

: I am a rent-controlled tenant in a 6-unit building in Manhattan.The new landlord has been negotiating vacate agreements with cash buyouts & we are now down to 2 occupied apartments. Does anyone know if the cash buyout is considered ordinary income or capital gains? At what rate would it be taxed? Also if a lawyer negotiates the settlement, are his fees tax deductible since they resulted in taxable income?

The official position of the IRS is that a rent-regulated tenant does not own their apartment, and thus cannot take advatage of any of the provisions in the Internal Revenue Code that allow homeowners to defer recognizing, or exclude from income altogether, payments for their homes. Thus, a rent-controlled tenant must report as income all payments received for surrendering their lease. Rev. Rul. 88-29, 1988-1 C.B. 75. The IRS will litigate this, and will not settle, as they would with any position covered by a formal prouncement, such a revenue ruling. And they will win in court. As for the Tax Court "S" case where a tenant reportedly won, these are not published decisions, and neither the Tax Court nor other courts will recognize them as precedent. Section 7463(b), Internal Revenue Code. Most likely, any gain will be capital, and long term if the tenant has held their lease for more than one year. However, the tenant would have a zero basis to their lease, since they have paid rent for occupancy, and not the lease. So all the cash received would be taxable.

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: : I am a rent-controlled tenant in a 6-unit building in Manhattan.The new landlord has been negotiating vacate agreements with cash buyouts & we are now down to 2 occupied apartments. Does anyone know if the cash buyout is considered ordinary income or capital gains? At what rate would it be taxed? Also if a lawyer negotiates the settlement, are his fees tax deductible since they resulted in taxable income?

: The official position of the IRS is that a rent-regulated tenant does not own their apartment, and thus cannot take advatage of any of the provisions in the Internal Revenue Code that allow homeowners to defer recognizing, or exclude from income altogether, payments for their homes.  Thus, a rent-controlled tenant must report as income all payments received for surrendering their lease.  Rev. Rul. 88-29, 1988-1 C.B. 75.  The IRS will litigate this, and will not settle, as they would with any position covered by a formal prouncement, such a revenue ruling.  And they will win in court.  As for the Tax Court "S" case where a tenant reportedly won, these are not published decisions, and neither the Tax Court nor other courts will recognize them as precedent.  Section 7463(b), Internal Revenue Code.  Most likely, any gain will be capital, and long term if the tenant has held their lease for more than one year.  However, the tenant would have a zero basis to their lease, since they have paid rent for occupancy, and not the lease.  So all the cash received would be taxable.


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