This is for PD Tax
The following is how I answered the question I posed to you. I had to submit today. Please review and let me know if I need to make corrections after the fact. Thanks.
For the tenant’s treatment of rental payments and additional lease expenses, Windish (2008) indicates "rent is the payment by the user of property
[tenant] to the owner of property [landlord] for its use and enjoyment. In general, gross income
includes rentals received or accrued for the occupancy of real estate. Rentals or other payments, required to be made as a condition to the continued use or possession, for purposes of the trade or business, of property to which the taxpayer [tenant] has not taken title or in which the taxpayer [tenant] has no equity, are deductible
as ordinary and necessary business expenses
" (p 126).
For the landlord's treatment of additional lease expenses, Windish (2008) indicates that "rent may be paid indirectly, for example, through the payment of the lessor's expenses or debts by the lessee. If the payment is made as a condition to the use or occupancy of property, other than as a payment toward the purchase of the property, the payment, regardless of its form
, is rent" (p 126).
Using net leases definitely provides opportunities to minimize taxes for the tenant. Specifically, any improvements made by the lessee in a short-term nonresidential lease for a trade or business may be depreciated in a shorter period of time rather than their normal class life. In fact, it is my understanding that the tenant's improvements are depreciated within the length of the lease. For example, let's say a tenant leases space in a newly built nonresidential rental property
to open a coffee shop. The space does not have air conditioning so the tenant installs a central air conditioning system. Normally, the expense for structural components such as air conditioning must be capitalized and depreciated for 39 years which is the class life of a nonresidential rental property. However, since the tenant has a 10-year lease, the air conditioning system would be depreciated within the 10 years, assuming the tenant intends to terminate the lease in the 10th year. I think the depreciation
amount for the first nine years of the lease would be the same as if the recovery period was 39 years. However, in the 10th year, the tenant would recover the remaining depreciation.
Although I cannot think of a really good example how a net lease can minimize taxes for a landlord, I believe it can. Most likely, it would have something to do with the way the net lease is written. I do know the rental payments for net leases are generally lower than most of the other types. Therefore, lower income
for the landlord means fewer taxes. If I think of something better, I will add it to this post. On the other hand, one big advantage of a net lease to the landlord is that the amount of money the landlord saves by allowing the tenant(s) to make improvements to the rental property allows him or her to have more money to invest in other money-making endeavors.
Windish, D. E. (2008). Practical Guide to Real Estate Taxation
. Chicago, Illinois: CCH, a Wolters Kluwer business.
The Tax Book (2012).