Question

A lessor is paid $45,000 by its commercial tenant as a lease cancellation fee. The tenant wanted to get out of its lease so it could move to a different building. The lessor has held the lease for three years before it was canceled. The lessor had a zero tax basis for the lease. The lessor has received: *a. Ordinary income of $45,000. b. Long-term capital gain of $45,000. c. Short-term capital gain of $45,000. d. Neither gain nor loss. e. None of the above.

Answer 1

Answer:

The answer is: A) Ordinary income of $45,000.

Explanation:

The $45,000 the lessor collected from the lessee (his tenant) should be included as ordinary income.

IRS Internal Revenue Code Section 10. b. 1. establishes that payments received by a lessor for the cancellation of a lease are considering ordinary income.