A lessor is paid $5,000 by its residential tenant as a lease cancellation fee.The tenant wanted to get out of her lease so she could move to a different city.The lease had been in force for two years before it was canceled.The lessor had a zero tax basis for the lease.The lessor has received:

Question

Quizplus · Accepted Answer

The lessor had a zero tax basis for the lease, so the full $5,000 fee is considered ordinary income. It does not qualify as a capital gain because the lessor did not dispose of any capital asset. Therefore, options B and C can be eliminated. Option D is also incorrect because there is a taxable gain. Option E is incorrect because one of the choices must be selected.

A Lessor Is Paid $5,000 by Its Residential Tenant as a Lease