We have an offer from a potential leasee on our second/investment property. He will cover the mortgage and 2/3 of the HOA for 3 years. In return, he will sublease and earn all of the rental income from the property. He is offering a 1% lease option fee.

We are new to this and wonder if that seems fair given 1) we will be taxed on his rental monies 2)we will be taxed on the rental monies he gains from the sublease 3) we will be taxed on the 1% option fee. Plus we don't cover all of our monthly expenses (mortgage + HOA) for 3 years.

His lease to us + the rental income he will be receiving may put us into a new tax bracket, right?

Are there any ways to increase our bottom line in this or structure it to decrease the taxes to us?

I think this may be great deal and one of the features of this deal that you may have overlooked is the potential appreciation of the building!

Anyways, lets analyze this deal w/o appreciation potential of the property. Firstly, from cash flow standpoint it appears to be cash flow neutral except for 1/3 of the HOA which I believe is very minimal. Once you compute for depreciation there is a strong possibility that this property would generate a net rental loss.

Hence, the rental property appears to be generating a slight positive at best or a zero at worst cash flow after tax impact!

Now, you state that the sub-leasing income generated by the lessee is additional income to you! I don't believe so, this sub-lease income is taxable to the lessee and not you. Therefore, you would not be subjected to a higher tax rate from this particular transaction. All in all, this appears to be an excellent deal for you in my opinion from the tax point of view especially once you take into account the depreciation factor!

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