Commercial Lease buyout

[Happy Camper]

Client received money for a commercial lease buyout in 2017. The payment was to change the lease so that the lessor can break the lease with 60 days notice. I know the payment would be considered capital gains however, when is the transaction triggered? In 2017, when the payment was received or when the lease is actually broken?

Client is accrual basis-can the payment go on the balance sheet until the future year that the lease is broken? He will likely close his business rather than relocate and closing would probably net to a loss. Client does not want to pay capital gains now then have a large capital loss in a future year.

I do not yet have the actual paperwork with the terms of the lease buyout...

Thanks for any input/direction!

[Burke]

Whether or not a lease cancellation can be considered under capital gains treatment depends on adherence to all requirement under 1241. It must be in conjunction with a sale of one or more capital assets. Note that a lease "modification" is not considered a qualifying action. You need to review that code section to see if your situation complies. Perhaps it is addressed in the lease buyout agreement.

[Snaggletooth]

Cannot hide in the balance sheet

I won't add to Burke's sage advice, but I would handle the transaction as follows:

1. Since this is a long-term lease, it should have been handled by booking the transaction at the time-adjusted cash value as of the entry date, with the excess every year reported as interest. The lessor would have had the option of reporting as an installment sale. This applies to the original arrangement/transaction.

2. Redo the new arrangement going forward with a NEW time-adjusted cash value, probably imputing the same interest rate of the original deal. The "new" principle should be compared with the "old" principle which exists at the same point in time. Going forward, there would be new amounts of interest to report in the future. The revised retirement of principle should be measured against the old retirement of principle. The difference would be the gain, and depending upon whether the installment method is in place determines whether it is reported in the same year or drug out throughout the remaining life of the lease.

3. The gain is either short-term or long-term depending on Burke's advice.