sale of leasehold interest

[michaelmars]

client sold the assets of a business allocated $300 goodwill, $500 inventory $100 fixtures $600 leasehold.

My question is,is the sale of the lease ordinary or capital gains?

[Maribeth]

Wow, good question. I'll try. The leasehold is an intangible asset. Could be similar to workforce in place. I'd say it was a capital asset and include it with goodwill on the Form 8594, which I have not looked at.

Maribeth

[OldJack]

Well... I look at it a little different than Maribeth. During the lease period the leasehold item could be removed and sold since it does not become property of the landlord until the lease expires.

Therefore, it appears to me that this is a tangible business asset and that the sale would be reported on form 4797 subject to recapture as ordinary income if there is "Nonrecaptured net section 1231 losses" from prior years (4797, line 8). As to depreciation recapture it would depend upon the leasehold asset classification, as an example if it was carpet it would be §1245 recapture subject to ordinary recapture, or if building structure, such as a fixed wall, it would be depreciated under §1250 and not subject to recapture as ordinary income.

[Jerry W]

client sold the assets of a business allocated $300 goodwill, $500 inventory $100 fixtures $600 leasehold.

My question is,is the sale of the lease ordinary or capital gains?

Pub. 544 may help answer your question.

Jerry W

[michaelmars]

OLD JACK you misunderstood or i wasn't clear, not leasehold improvements, the lease itself is what was allocated value. - not a depreciable asset, not even an asset on the books

[RoyDaleOne]

Most likely the lease itself is a capital assets and therefore afforded capital asset treatment. Capitual Gains that is.

Note that you labelled the lease as a leasehold. You have to very careful what you label something because it can get you a response that you don't want.

[DANRVAN]

OLD JACK you misunderstood or i wasn't clear, not leasehold improvements, the lease itself is what was allocated value. - not a depreciable asset, not even an asset on the books

A lease-hold is an intangible per Reg § 1.162-11. The buyer will amortize it, your client will treat the sale of it the same as goodwill, capital gains.

[RoyDaleOne]

OLDJACK you are correct and 1.178-1 covers the cost of acquireing the lease

[michaelmars]

thanks everyone and sorry for the confusion.