PROPRTTIES | 06/23/2024
When operating or selling rental real estate, it’s essential to understand the tax implications associated with intangible assets. These can include lease acquisition fees, lease cancellation fees, and loan origination fees. Properly classifying and handling these assets for tax purposes can help property owners manage liabilities, optimize deductions, and make informed decisions.
Lease Acquisition Costs
Lease acquisition costs, such as brokerage fees, provide benefits over the lease’s duration and must be amortized over that period. However, the tax treatment varies depending on specific events:
- Early Lease Termination by Tenant
If a tenant terminates a lease early, the unamortized portion of the asset becomes fully deductible as ordinary income in the year of termination. - Building Sale with Lease in Place
When selling a building with an active lease, the unamortized balance of the lease acquisition costs is included in the basis of the building. This reduces capital gains (or increases capital losses) from the sale.
Lease Cancellation Fees
Lease cancellation fees paid by landlords to terminate leases are considered capital expenditures. The recovery of these costs depends on the circumstances of the termination:
- Space Reclaimed for Owner Use
Fees paid to terminate a lease for the landlord’s use of the space must be amortized over the remaining life of the terminated lease. - Space Re-Leased to a New Tenant
If the space is being prepared for a new tenant, the costs are amortized over the term of the new lease.
Loan Origination Fees
Loan origination fees for financing real estate purchases must be capitalized and amortized over the loan’s term. The treatment of unamortized balances varies based on how the loan is resolved:
- Refinancing with the Same Lender
The unamortized fees are amortized over the term of the new loan. - Refinancing with a New Lender
Any remaining unamortized fees are deductible in the year of the refinance. - Property Sale and Loan Payoff
When selling a property and paying off the loan, the remaining unamortized fees can be fully deducted as ordinary income.
How We Can Help
Tax rules for intangible assets in rental real estate are nuanced, and improper classification can lead to missed opportunities or unexpected liabilities. Our tax consulting firm provides tailored advice to help property owners:
- Correctly classify and amortize intangible assets.
- Optimize deductions during lease terminations, refinances, or property sales.
- Ensure compliance with IRS regulations to avoid penalties.
Contact us today to ensure your real estate transactions align with best practices for tax efficiency and accuracy.