Rental-additional payments for option to buy

[Randall]

Client rents house. Tenant is paying additional payments toward potential purchase. Payments will lower future sales price. Payments are forfeited if tenant doesn't purchase home.

My question: Are these payments reported by client (landlord) as additional rent, other income, or postponed and booked as deposits. I couldn't find something on point about this, general reference to conditional sales contract. It doesn't seem to fall into the category of installment sale. I don't think he can hold the money as deposits or whatever. It seems it would just be additional rental receipts or other income. Then in the future, the sales price would just be lower.

[Gail in Virginia]

Has a sales price been agreed on that these extra payments are going towards? I would wonder if they should be installment sale payments, and then if the sale falls through you calculate the gain or loss on repossession. But it sounds like these extra payments may or may not go towards some distant agreement to sell that does not have a negotiated price yet. In which case they seem to be rent, and just have the added feature of lowering the sale price, whatever that turns out to be. Landlord would have more income now, but less upon sale of property. Doesn't really sound like a good deal for the tenant from the little information given.

[Max W]

The income to the owner is rental income. If the option is exercised, the option payments and rent credits go to the basis of the property. The option period should not be more than 3 years or the IRS might try to reclassify it as an installment sale.

[Randall]

Thanks. I thought it should just be additional rent. No installment sale, still collecting rent and sale isn't stated, just potentially. Aggreement states additional payments to reduce future sales price.