redeemable ground lease

[rick in cal]

I have a relatively new client who just called me to ask if the rent she pays on the land her house sits on is deductable. I got the usual reason we get so often; "my friend deducts his rent" At first I thought about mobile home parks and said no but after further conversation and more details I told her I'd research it. Her monthly land rent fits the IRS criteria to be treated like interest under Redeemable Ground Rents. Now I'm wondering why mobile home parks don't market there space the same way. Does anyone deal with this situation. It seems very rare here in Ca.

[RoyDaleOne]

If the land is not used in an activity for profit, how can you deduct the rent?

If the rent is equivalent to a note and mortgage, the imputed interest maybe deductible.

[rick in cal]

RoyDaleOne, Your response was the same as my initial response and just the fact that very few people are chiming in leads me to believe that this write off is seldom used. If you go to Quickfinder or some other similar source, look up Redeemable Ground Rents and tell me what you think. I interpret it as saying if the contract is written correctly the monthly rent is written off as interest by the home owner who is paying land rent in addition to their mortgage. I'm getting ready to amend some returns and would love for anyone to tell me if they think I'm reading this correctly or not. I wouldn't even mind a couple of insults from Jainen just to get his valued opinion!

[RoyDaleOne]

Code Sec. 1055. Redeemable ground rents

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(a) CHARACTER

For purposes of this subtitle--

(1) a redeemable ground rent shall be treated as being in the nature of a

mortgage, and

(2) real property held subject to liabilities under a redeemable ground

rent shall be treated as held subject to liabilities under a mortgage.

Has its own Code Section.

[David1980]

Code Sec. 1055. Redeemable ground rents

--------------------------------------------------------------------------------

(a) CHARACTER

For purposes of this subtitle--

(1) a redeemable ground rent shall be treated as being in the nature of a

mortgage, and

(2) real property held subject to liabilities under a redeemable ground

rent shall be treated as held subject to liabilities under a mortgage.

Has its own Code Section.

The reason most mobile home parks don't market it as a tax write off is because it's just nonredeemable ground rent, and not redeemable ground rent. Redeemable is an important word. Basically it's called a rent but is really more like a vehicle lease in that there's a provision in the agreement to buy the land for a set price after some period. I think B3's requirement that the right must exist "by virtue of State or local law" rules out most all states and localities since it's not required by law in most places.

Here's the definition from the section.

( Definition of redeemable ground rent. For purposes of subtitle A

of the Code, the term redeemable ground rent means only a ground rent

with respect to which all the following conditions are met:

(1) There is a lease of land which is assignable by the lessee

without the consent of the lessor.

(2) The term of the lease is for a period in excess of 15 years,

taking into account all periods for which the lease may be renewed at

the option of the lessee.

(3) The lessee has a present or future right to terminate the lease

and to acquire the lessor's interest in the land (i.e., to redeem the

ground rent) by the payment of a determined or determinable amount,

which amount is referred to in Sec. Sec. 1.1055-2, 1.1055-3, and

1.1055-4 as a redemption price. Such right must exist by virtue of State

or local law. If the lessee's right to terminate the lease and to

acquire the lessor's interest is not granted by State or local law but

exists solely by virtue of a private agreement or privately created

condition, the ground rent is not a redeemable ground rent.

(4) The lessor's interest in the land subject to the lease is

primarily a security interest to protect the payment to him of the

annual or periodic rental payments due under the lease.

[kcjenkins]

Do you have a list of which states or localities have that right in their laws?

[jainen]

>>I wouldn't even mind a couple of insults from Jainen just to get his valued opinion! <<

In my opinion, you wicked man, Californians prefer the five year rent with option rather than the 15 year redeemable lease. Who wants to spend a decade building their dream house with zero equity?

Ground leases are more common with commercial property. By the way, California tax law does not conform to Section 1055 for corporations. And don't you think you've had enough of that Halloween candy already?