COMPARE WITH CAPITAL LEASES WITH OPERATING LEASES

SoccerBoss
Category:
Accounting
Price: $25 USD

Question description

Over the years, I have had many leasehold tenants in my Arizona rental home. As you know, I am not a real estate professional, nor do I have the time to actively participate in the maintenance of this property. All of the prior tenants have rented the home for 2 years or less. I was showing the home to a potential new tenant and they are very interested in the Arizona home, but they proposed a lease-to-own contractual agreement, rather than my usual year-by-year lease agreement.


I have owned the Arizona home since 12/31/1974, which is in a great neighborhood, and the home has not received any major remodeling. Even if improvements were made to the home, I don’t believe the improvements would contribute to (or increase) the home’s useful life. The useful life will come to an end very soon because the home’s foundation is unstable. 


The potential tenants would like to rent the home for the next three years, from 1/1/2015 to 12/31/2017, and the title would transfer on 1/1/2018. Before I accept their proposal, could you tell me how this lease-to-own agreement is different than my prior year-by-year lease agreements?  Will my bookkeeping & journal entries be different than before? Assuming yes, could you provide examples (and explanations) of the journal entries? Lastly, do you think this lease-to-own contractual agreement is a good decision? Are there any pros or benefits? Could this be a bad decision for me? Are there any cons or negatives?


Tutor Answer

(Top Tutor) Daniel C.
(997)
School: Duke University
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