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Deducting Property Lease Payments on Sched. A

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    Deducting Property Lease Payments on Sched. A

    This question came up for me last tax season with 2 of my customers. Now again, I am faced with it and I wanted to get your feedback on it.

    In our area of MN we have a lot of lakes and a majority of the land surrounding these is leased land. The lease holder is MN Power. One of my past customers paid $2500 in 2004 for her property taxes, and then also paid, $2500 in monthly lease payments to MN Power. She had previously done her own taxes, but had made a draw from her pension early in order to buy a car, and wasn't sure how to handle that on a tax return, thus hired me to figure it out for her. Because she owed the 10% penalty on the retirement draw as well as tax, she ended up owing on her return. I had not deducted the lease payments on Schedule A (she wanted it under line 8 "other") for her; although this is what she had done previously.

    I called 3 different times to the IRS line and got 2 out of 3 agents to say that we could not use that deduction on Schedule A because it wasn't not a gov't proposed tax. In order to be deductible on Federal 1040, it has to be gov't proposed. I also contacted the MN Power Lease Dept and was told by that they used to offer rebates to the land owners off their state returns but no longer did so.

    Several people I know pay to have their returns done by different CPA's and H & R Block locally, and all of them say they deduct it on Schedule A every year. This often makes the difference of them owing or not owing. Most people who live on these lakes are let's say, "very well off financially".

    I gave the client the option to do it, but it would be against my advice. She chose to do it. I don't think she'll come back this year, because she can most likely do her own taxes again since things will be back to normal.

    My sister-in-law's parents are thinking of going with me, and they too live on a local lake on leased land; and have previously deducted this amount on Schedule A, with other tax preparers.

    I don't want to have other client's upset with me when I tell them my thoughts. I really felt I was doing the right thing by going with the 2 out of 3 agents.

    Note: The 3rd agent who said "yes" was confused about how it was possible to "rent" your land. I tried to use the example of those who own trailer homes and then place them on rented land. It's the same concept. The house is their's, the land it technically not.

    What am I, or could I be missing? Any exceptions, advice, comments? Thanks!

    #2
    purpose?

    what is the purpose of the leased land? is the taxpayer's home located on the property? i would not classify this as a tax, it sounds like rent. rent is not deductible for an individual, as I'm sure you know. looks like these folks are just looking for a deduction where one doesn't exist. check around with other preparers and see if someone with this scenario has been audited and what the outcome was. that would be good for you to use with future questions.

    Comment


      #3
      Redeemable Ground Rent

      Try TTB, page 4-13.

      It talks about redeemable ground rent [Reg. 1.1055-1(b)]. Annual or periodic rental under a redeemable ground rent may be treated as mortgage interest if certain conditions are met. It looks like TTB info might apply to you situation.

      Comment


        #4
        I suspect that as owner of the land, MN Power is responsible for paying the property tax. It is charging the renters for the tax & probably including it as income & deducting the tax on its return. It doesn't sound like it's deductible for the renters.

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          #5
          Land Rent? Tax? Interest?

          Could you call MN Power & Light & get more info from them?

          Comment


            #6
            More information

            Thanks for your responses.

            what is the purpose of the leased land?

            They live on it (their house is on it), but I suppose there are others who just have the land and maybe have intentions to build some day but have not thus far. Or maybe are just holding onto it. It's a good investment in our area.


            Could you call MN Power & Light & get more info from them?

            Yep, I can. I will on a later day (busy with my 2 boys today). When I call, what would you suggest I specifically ask?

            I am going to do more research on this and will most certainly try to find anyone who has been audited in this situation and see the outcome. I was hoping someone here might have been there already.

            Thanks again, and I'll keep looking!

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