A land lease offers many opportunities for both tenants and owners to reap tax benefits that help them save money. Not only do land leases occur with properties affiliated with retail or commercial endeavors, they also occur with residential and agricultural developments across the United States. Tax laws differ in each state, but the majority of land leases protect both parties involved in the deal.

What is a Land Lease?

A legal agreement between a landowner and a tenant that permits the tenant to use the property and build structures on it for a set amount of years is called a land lease. Leases are typically long-term agreements, lasting anywhere from 50 to 99 years. They usually happen in large metropolitan areas where commercial property values are at a premium.

What are Your Property Tax Obligations?

Tenants benefit are gained from not having to pay property taxes on the land that is leased. Property tax responsibilities go to the owner, unless otherwise stated in the lease agreement. If the land is valuable and is located in a highly valued commercial district, then it has remarkably high property taxes. Instead of being forced to pay taxes on the land itself, tenants must only pay taxes on the structures or changes they make to the property.

Did You Know There is an Income Tax Benefit for Landowners?

When a landowner sells their land, he or she is accountable for reporting the money they obtain for the property as income. Since the property is not sold when a land lease is activated, there is no revenue to report to the Internal Revenue Service. The recognition of gain through their land lease can be avoided. Any rent collected from the land lease is taxable, but there are still benefits for the landowner; the rent income is taxable at the usual income rate instead of the capital gains rate, which would have applied if they had sold the property.

How Do Tenants Benefit on their Taxes?

Tenants are able to report their rent payments on both their federal income tax statement and state income tax statement. The rent payments are tax deductible and it cuts down on the amount of taxes a tenant has to pay.

Did You know You Can Deduct for Any Improvements Made to the Land?

There are several deductions tenants may claim for any structures built on the property, in addition to depreciation on the structures.  Any changes that increase energy efficiency can be deducted on the tenant’s income tax claims and any expenses they may accumulate because of a business endeavor can deducted as well.