cell tower lease, again

[JenMO]

Another client has had cell tower rent for several years. Now the company (not sure who)wants them to sign a lease for $50,000. it will be re negotiated in another 10 years and can be renewed in 20. Client says it is not a sale of land, just the lease. He can receive in one lump sum, or over 3 years. If it is not a sale of land, would this be ordinary income. Any was it could be capital gains?

[David1980]

I think the companies making these kinds of offers tend to advertise the income as being subject to long term capital gains all the while saying that they can't be relied upon for tax advise. Since it's a payment for use of land for a limited time period I don't see how it could be capital gains.

[mastertaxguy]

Cell tower lease payments

1. Probably would be good for you to see the documents presented and signed.

2. Might this be a purchase/sale of an easement?

[Zee]

Easement?

1. Probably would be good for you to see the documents presented and signed.

2. Might this be a purchase/sale of an easement?

Very good question. If it's a permanent (perpetual) easement, the payments would would reduce the basis of the land affected by the easement creating a deferred capital gain recognizable on actual sale of the land. However, from the description in the original post it appears to be an operating lease and ordinary income recognition.

[FEDUKE404]

Sounds like rental income

The original post by JenMO referred to "rent" payments.

How could such ever be construed as being eligible for capital gains treatment? ?

FWIW: A family member (in Colorado) is in a similar situation. He allows a tower (phone/TV/whatever) to be maintained on a corner of his property. (Well, actually....it's a ranch.) All income from such is annually reported as rent on Schedule E. There never was a consideration of an easement scenario by any of the parties involved.

FE

[Zee]

The original post by JenMO referred to "rent" payments.

How could such ever be construed as being eligible for capital gains treatment? ?

FWIW: A family member (in Colorado) is in a similar situation. He allows a tower (phone/TV/whatever) to be maintained on a corner of his property. (Well, actually....it's a ranch.) All income from such is annually reported as rent on Schedule E. There never was a consideration of an easement scenario by any of the parties involved.

FE

I don't think the original poster used the term "rent" (or did I miss it?). He used the term "lease" to describe the situation. So, the suggestion to check the terms of the "lease" by MasterTax Guy is a very good one to ensure the taxpayer has communicated the contractual agreement properly. A land owner can grant a "permanent" easement to a lessee for the right to use that land. In my earlier response, I indicated the payments would reduce the basis of the land and result in deferred income until the land is sold. I don't think that was correct. I believe it would be treated as a sale and result in capital gain. See below for a better explanation I found on the web on the use of cell easements.

If there is no permanent easement, it's ordinary income. And, the language in the post "that it can be renewed in 20-years" also makes it sound like an operating lease to me. I found this question interesting, and the 2nd person to respond that cell company's are telling people the income is capital gain might be correct if the structured properly. I also learned there are companies that claim they can restructure cell leases using 1031 exchanges that will qualify the income for capital gains (I don't quite understand the process), but they're relying on PLR 201149003.

"An easement, sometimes characterized as a “communications easement”, constitutes a transfer of an interest in the real property under state law. As such, the conveyance of an easement for consideration results in a sale taxable at (currently) lower capital gain rates. The creation of a lease or the grant of a license, on the other hand, results in a contract right to receive rent or license fees over time. Rents and license fees are generally included in the owner’s income when received and are taxed as ordinary income, at rates that are generally higher. Looking at the transactions from a non-tax perspective, the grant of an easement is usually not terminable by the owner since the grantee acquires a deeded interest in the real property itself. The grant of a license or fee, on the other hand, will be terminable upon the expiration of the lease or license term. Given the greater limitations on the owner’s future use of a property subject to a perpetual easement, the grant of an easement generally commands a much greater premium than the grant of a terminable license or term lease".

"If the communication easement is perpetual (e.g., runs with the land), then there is yet another structuring opportunity that sets the easement apart from the grant of a license or leasehold. In many instances, the IRS has characterized a perpetual easement as property that is “like kind” to a fee interest in real property for purposes of tax deferral under Internal Revenue Code § 1031. Accordingly, if the transaction is structured as sale of a communication easement, the property owner would likely be able to engage a qualified intermediary to facilitate a 1031 exchange of the perpetual easement for other real property to be held by the owner for investment or for use in a trade or business. There is no similar opportunity to defer the tax arising out of a license fee or rent in the case of a lease apart from the limited deferral afforded by the owner’s receipt of license or lease payments over time".

I've used this as post as a learning tool. It does look like there might be some tax planning opportunities related to cell tower leases. Please forgive me for all the edits.

[JenMO]

Been away from the computer...I will contact client and ask what kind of information slip (1099misc or 1099 s) that company is intending on sending them. Sometimes what they send is different from what the landowner was told, and it's hard to get the cell phone co to change the information form. If it's an easement, I think reduction of basis, or pay capital gains, but as a lease it would be ord income. what cell co is wanting to pay is $50,000 one time, maybe until 10 or 20 years. My client wasn't real clear, changed numbers some time, so I don't think he understood. I think the big money looked good.