Real Estate Lease/Purchase

[Sabre]

My client is going to build a $200,000 commercial building for a tenant who will lease the building(triple net) for 10 years paying a monthly rental.
At the end of 10 years the tenant will purchase the building for one dollar.

How do I show this on the annual tax return my client files? What depreciation can I take? Over how many years?

How do I show the sale in the 10th year on my clients tax return-tax ramifications?

Thanks

[Roberts]

Sounds like an installment sale.

[Roland Slugg]

How do I show this on the annual tax return my client files?

As a sale. It is not a lease. For the selling date I would use the date the other company takes possession of the building.

What depreciation can I take? Over how many years?

Well, YOU can't take any, and neither can your client. What you have described is a financing arrangement.

How do I show the sale in the 10th year on my clients tax return-tax ramifications?

Moot point. The sale will, presumably, be reported on the installment method, so in the final year, the last of the principal payments will be reported, along with the interest received (or imputed) in that year.

You didn't mention interest, so if there isn't any specified in the lease/sale contract, interest will have to be imputed. (See Code §483 and related Regs.) Since the contract is for a period of ten years, use the long-term AFR. (Code §1274(d)(1)(A))

Also note that the other party ... the buyer/occupant ... can not deduct his payments as rent. (Code §162(a)(3))

[Burke]

Was this your client's idea? Has he consulted a good real estate attorney? I think it could be structured differently which would be more to his advantage.

[Sabre]

Different Structure-Burke

Would love some ideas?