Real Estate Sale Lease Back: Learn About It

Sale Leaseback Accounting

Care needs to be exercised when interpreting GAAP. All specifics of the transaction should be verified with an accountant since a number of other issues can impact the tax treatment in a Sale Leaseback including the fair market value of the property vs. the Sale Leaseback sale price. Additionally, subleasing more than 10% of the property, having a re-purchase option and whether or not the seller/lessee is loaning the buyer money, etc. can all impact the accounting treatment under GAAP.

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Gain / (Loss) Is Defined as Follows: 

Base Rent is the rent excluding operating expenses and taxes (i.e. NNN rent) and the NPV is the net present value of the rent stream over the term of the lease. Note: Unamortized loan fees, if any, are written off and taxed at the ordinary income tax rate.

Accounting Scenarios Under GAAP - Sale Leaseback (already own property before entering into a Sale Leaseback), or Purchase with a Sale Leaseback (purchase property, then IMMEDIATELY enter into a Sale Leaseback)

What is "Active Use"?  - The IRS allows the entire gain or loss to be booked on the sale date if the leaseback is not in "active use". What this is saying is that if only a small portion of the space is leased back, the entire gain or loss to be booked on the sale date. The amount of space, e.g., 25%, 15%, 10%, etc., is not defined by the IRS and subject to interpretation. However, 10% seems to be a very defensible percentage.

IRS Sec. 1250 Depreciation Recapture - In a C corporation all costs and income are typically taxed at the same percentage, as there is no separate capital gain tax rate. However, in a non-C corporation (e.g. an LLC), the depreciation that has been written off over the previous ownership period is subject to "recapture" and taxed at a different tax rate than ordinary income or capital gains. Typically the Sec. 1250 depreciation tax recapture rate is taxed at 25%. Please note that the amount of depreciation that is subject to recapture is the lesser of the total depreciation taken or the amount of the gain. There is no Sec. 1250 recapture if the building is sold at a loss. Additionally, any gain that is generated from the portion of the sale that is related to the land is not subject to recapture, since land is not a depreciable asset.

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Other Topics About Real Estate Sale Leaseback

What Is a Sale Leaseback?

Advantages of a Sale Leaseback to the Seller / User

Disadvantages of a Sale Leaseback to the Seller / User

Strategic and Operating Considerations for the Seller / User

Advantages of a Sale Leaseback to the Investor

Disadvantages of a Sale Leaseback for the Investor

Key Elements and Assumptions in Analyzing a Sale Leaseback

Creating a Sale Leaseback Financial Analysis

Sale Leaseback Accounting

Bottom Line

Caution

© 2007 James R. Duport, All rights reserved. You are free to use the material above in whole or in part, as long as you include complete attribution, including a live web site link. Please also notify me where the material will appear. The attribution should read: "By James R. Duport, President of LseMod. Please visit our web site at http://www.LseMod.com for information on our site selection financial analysis software for commercial real estate. LseMod, the professional’s choice since 1996, is lease modeling made easy - easy to use, easy to understand, easy to explain."