You are absolutely correct! I wasn’t thinking of it in terms of expensing the payments… I was too tight within the box (Functional Fixedness… Cognitive Rigidty, as it were). My humble deference on this one. My mind Lease Op[tion mind was on the Meat and not the Sandwich" (Hmm… not bad… “the meat, not the sandwich”… 'think I’ll have that one laminated for my wallet).
Bill
I teach the dangers and folly of Cognitive Rigidity in my own seminars, and now suddenly I find I have contracted the dreaded disease myself. 'Will get injected tomorrow.
Posted by Mark (SDCA) on April 20, 1999 at 15:35:00:
Here is my take on a deal I am working on:
(Basically, this is a sandwich lease).
I must report all the rent money I receive as income on my Schedule E. (This seems like a given).
Any repairs I make can be deducted on same.
The option consideration is not a taxable event. (But since I am borrowing that, the interest IS tax deductible).
However, (and this is the problem I am wrestling with), all the rent payments I make to the current owner are NOT tax deductible. (Since it’s rent and not interest payments or property taxes).
So my conclusion is that this deal is not “tax friendly” and would need to stand on the cash flow, strike price/potential appreciation alone. Yes, no, maybe??
Posted by Bronchick on April 20, 1999 at 18:32:42:
Who says you can’t deduct your master lease payments on a sandwich lease/option? If you are renting from an owner and subleasing, you can certainly deduct the lease payments you are making against the income you receive.
Posted by Bill Gatten on April 21, 1999 at 16:47:13:
Bill,
How would a Master Lease stand up under Sec. 163 and 167, etc. if there is no actual Contract for Sale and/or passing of legal and equitable interest (not a rhetorical statement… a real question)?
I would agree that a Lease Purchase would do it: but unless there’s a specific obligation and intent to purchase at a particular time for a specific amount… my understanding is that it wouldn’t pass the test (re. intent, and the conveyance of legal and equitable interest or title). In the Belden Decision,* my understanding is that this factor was reviewed, and the (favorable) decisions was based upon ascertaining without question the intent (and obligation) to purchase having been effected. In a standard Lease Option, has the intent purchase been locked in stone? And if so, why wouldn’t it then be a Lease Purchase with all the ramifications of title having passed (negative income tax consequences, DOS violation, subjection of each party to the other’s liens and personal problems, etc.)?
*WENDELL D. BELDEN AND SANDRA J. BELDEN, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Docket No. 4747-93 UNITED STATES TAX COURT, T.C. Memo 1995-360; 1995 Tax Ct. Memo
Posted by JHyre in Ohio on April 20, 1999 at 19:42:40:
Whether a trust or LLC or partnership or just you is involved, lease payments should be deductible under IRC 162 (Deductions from a trade or business) OR or IRC 212 (Deductions from a for-profit activity), depending on the exact facts & circumstances. With the exception of “dealer” status, sandwich L/O’s are close to as tax-friendly as making money gets. You may wish to use a corp for L/O activity, see www.legalwiz.com for articles on corps & flips.
Posted by Bronchick on April 21, 1999 at 17:55:29:
The question was whether master lease payments are deductible against income on a sublet. Of course they are: “Reasonable and necessary” business expense. The business here is rentals. The expense of doing business requires making master lease payments.
Posted by Bill Gatten on April 21, 1999 at 19:00:08:
Your are so correct (as correct as you can get). See my humble response to Bill Bronchik’s note (The Pope is allowed one mistake in his life… I get two).