Taxpayer received an $850K option for purchase of real estate that the taxpayer holds as a rental. The buyer (not the renter) was not able to complete the transaction and forfeited the deposit. Is it capital gain or ordinary income to the taxpayer?
Initial research of Sec 1234A suggests it is ordinary income because 1234A only applies to capital assets, which excludes Sec 1231 trade or business property.
However, my RIA Checkpoint Federal Tax Coordinator gave me a nugget in ¶ I-6276. It said that a passive investment would not be considered a trade or business property under Sec 1231, and therefore would not be excluded from Sec 1234A capital asset treatment. It cited the following cases:
CRI-LESLIE, LLC v. COMM., 121 AFTR 2d 2018-794 (882 F.3d 1026),
WASHINGTON MUTUAL, INC., ET AL. v. U.S., Cite as 119 AFTR 2d 2017-818 (130 Fed. Cl. 653)
WMI HOLDINGS CORP. v. U.S., Cite as 121 AFTR 2d 2018-1958 (891 F.3d 1016)
I did review the first case on this list and confirmed that is true.
The real estate is currently held by the taxpayer as a commercial rental. (It is actually residential property that is being used by an unrelated commercial business.) The taxpayer does not meet material participation. This is a passive activity.
But, I think I am missing something here. If the taxpayer sold this property at a loss, I would be claiming Sec 1231 treatment and claim ordinary loss. I know I can't play it both ways here. I am missing something.