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the agreement to a lease-option agreement (the agreement). It is
not clear whether the agreement was formalized in a written
document, and many of its terms are not clear.
Under the agreement, petitioner was to pay Peterson $5,000
for an option to purchase the property at any time prior to
August of 2002. Also under the agreement, petitioner’s monthly
rental payments increased from $850 to $1,051 per month. The
$1,051 was equivalent to the amount Peterson paid to his mortgage
lender each month on the mortgage on the property. In written
correspondence to petitioner, Peterson informed petitioner that
“about $990 [of the $1,051] is the deductible interest,” but
Peterson did not specify by whom he intended the interest to be
deductible.
Under the agreement, it was understood that petitioner was
to pay the real property taxes on the property, and Peterson
apparently told petitioner that for Federal income tax purposes
petitioner could deduct the property taxes.
Peterson agreed to continue to pay fire insurance on the
property for at least 1 additional year in exchange for
petitioner’s agreeing to repair the roof.
According to the agreement, to exercise the purchase option
any time before August of 2002, petitioner was to pay Peterson a
second $5,000 and to pay off the outstanding balance of the
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