Nov 252014

In a previous article, we saw how the tax legislation allows a business tenant to deduct the income element of the premium paid under a short lease. In particular, we found that the deduction is spread over the term of the lease.

This makes sense and has symmetry, though this symmetry is due to the legislation. Under the lease premium rules the landlord is treated as receiving part of the premium as income, so the tenant is treated as having incurred this same amount as an income expense. However, this statement isn’t quite true as we shall find out.

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Property Tax and the Lease Premium Rules – Why is the tenant’s tax relief spread over the lease?

 Property Tax  Comments Off on Property Tax and the Lease Premium Rules – Why is the tenant’s tax relief spread over the lease?
Nov 192014

When a landlord grants a tenant a short lease for a premium, part of the latter sum is treated as an income receipt in the hands of the landlord. The tenant is allowed to deduct this income element against his own revenue receipts, the deduction being spread over the length of the lease (we are assuming that the tenant is occupying the property for business purposes).

I know this latter fact because this is one of the topics that I learned about when I attended the courses that my employer sent me on, when I started my tax career. I also know this because I read about it in an article on buying and selling real estate which appeared in one of the various tax magazines.

That article even had the statutory reference for the tenant’s deduction, so that I could feel confident that it was a true statement. But until recently I didn’t have occasion to look too closely at what the legislation said. And when I did look, I found that the answer wasn’t as obvious as I had expected.

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Nov 102014

Consider the following scenario, where we have a tenant occupying business premises which it wishes to vacate. The reasons could be various. For example, it has surplus office space, or perhaps the tenant is a big retailer who has discovered its mistake of opening a branch in a dead end part of town and now wants to make a “strategic withdrawal”.

In these circumstances, the tenant may be willing to pay the landlord a sum of money in order to free itself from its obligations under what has become an onerous lease. What are the tax implications of this transaction? In particular, is the tenant’s exit payment tax deductible?

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