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R. Klein, EA
R. Klein, EA, Enrolled Agent
Category: Tax
Satisfied Customers: 2879
Experience:  Over 20 Years experience
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If you purchase a property with a credit tenant in place, are you able

Resolved Question:

If you purchase a property with a credit tenant in place, are you able to depreciate the existing property?
Submitted: 11 months ago.
Category: Tax
Expert:  barristerinky replied 11 months ago.
Hello and thank you for using JA! My goal is to provide you with excellent service and help with your legal problem.
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Are you talking about a "credit tenant" in terms of a national or regional tenat with a credit rating of BBB or better that resulted in the lender offering more favorable financing terms for the purchase?
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Or are you using the term to denote something else?
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Thanks
Barrister
Customer: replied 11 months ago.

We are looking to purchase a property with a current "credit tenant in place in a 1031 exchange. We would be receiving the monthly lease payments from the tenant. What are the tax implications of the sale and then purchase of the lease? Currently, we are depreciating the building on the current property since we own it. So if we sell it, and do a 1031 exchange to purchase a new property with a tenant in place, are we able to deduct any depreciation or expenses on the new property or do we carry over the basis from the other property?

Expert:  barristerinky replied 11 months ago.
To be honest with you, this is more of a Tax question than a Landlord Tenant or Legal question.
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Let me get you over to Tax where they will be able to fix you right up..
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Thanks
Barrister
Expert:  R. Klein, EA replied 11 months ago.
Thank you for contacting me about your Tax issue. I will work hard to help you understand the issue clearly.

Yes, you can and should depreciate the property from the time you acquire it.

The depreciation is based on the cost basis of the building you acquired, which may be a combination of the cost basis of the original property you exchange (minus depreciation taken before sale), plus any additional "boot" you added to purchase the new property

Keep in mind that you can only depreciate buildings and tangible property. You cannot depreciate raw land (such as if you have a land-lease arrangement).
R. Klein, EA, Enrolled Agent
Category: Tax
Satisfied Customers: 2879
Experience: Over 20 Years experience
R. Klein, EA and 3 other Tax Specialists are ready to help you
Customer: replied 11 months ago.

So if we were to find a credit tenant that wanted to use our land to build their business on and we entered into a land lease, they would get to depreciate the building, not us, is that correct? Since we really don't own the building, just the land.

Expert:  R. Klein, EA replied 11 months ago.
Correct. Only the building owner can depreciate the building. And no depreciation for land owner. The only deduction you would have is property tax if you paid that, but typically, the tenant pays that.

A ground lease is a simple income stream.

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