Is lease to own time qualified use for sec. 121 exclusion?

[David]

TPs leased their primary residence from 2010 until they purchased the house in 2013. They sold the house in 2014.

I can't find any cites or information that says that the lease to own time period counts as qualified use for the gain exclusion. I want to make sure that the TPs don't qualify for the gain exclusion before making the assumption that the qualified use begins on the date they purchased the house.

Thanks. 

[Max W]

It all depends how the lease was structured.  

From Pub 544 "Some agreements that seem to be leases may really be conditional sales contracts. The intention of the parties to the agreement can help you distinguish between a sale and a lease. There is no test or group of tests to prove what the parties intended when they made the agreement. You should consider each agreement based on its own facts and circumstances."

You will have to read the lease agreement.  When the lease was signed, was there a high probability that the option to buy would be exercised.If the client was gaining equity in the house, it strengthens that argument.  In other words, were part, or all of the lease payments being counted as acquiring equity.   

 

[David]

Thanks, Max. 

I see that in pub. 544 but does that qualify as ownership that meets the sec. 121 gain exclusion? 

Thanks. 

[Max W]

It's a "facts and circumstances" thing.  If they show that it was some form of installment sale, or that the cient was gaining equity, then there might be a case that the client began to acquire ownership in 2010. 

This is the kind of issue that ends up in tax court.

Here is a link with more information.

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