A leaseback is a financial transaction in which one party, typically an investor, purchases property from a seller, then leases the property back to the seller. This type of transaction is most commonly used for the transfer of real estate and vehicles, although any type of personal or commercial property may be sold through a leaseback. The arrangement has advantages and disadvantages for both sellers and buyers.
Pros For Buyers
A buyer can improve cash flow through a steady stream of income from the seller/lessee for very little work. If the property is used as a business property to generate income, then the buyer can take tax deductions for depreciation. This is a deduction the IRS allows over the useful life of a business property starting from the date it is placed into service. The buyer can also deduct interest paid on a mortgage or loan used to acquire the property.
Cons for Buyers
If a seller who has leased back the property does not make lease payments on time, a buyer can incur the expense and hassle of repossessing the property or evicting the seller in the case of a real estate leaseback. If the seller initiated the leaseback transaction for the purposes of hiding assets from the IRS or a bankruptcy trustee, the bankruptcy court or the IRS may seize the property, which can result in financial loss for the buyer.
Pros for Sellers
The seller can receive a lump sum of money by completing a leaseback. This can help sellers who are behind on mortgage payments or other debts, or who otherwise need cash quickly. A leaseback also allows the seller to retain the property for use or to remain in a real estate property instead of losing the property in foreclosure.
A seller who leases the property in a leaseback may deduct necessary and ordinary expenses involved in leasing property for business use, including machinery and real estate. However, if you use equipment or real estate for both business and personal use, you may only deduct the portion of expenses related to business use.
Some leasebacks also contain provisions permitting the seller to repurchase the property after a specified length of time, provided that all lease payments have been made to the buyer.
Cons for Sellers
The primary disadvantage of a leaseback for a seller is that the property is no longer considered an asset. This may affect your ability to obtain future credit lines or loans. A leaseback also prevents the seller from deducting property depreciation, real estate taxes and mortgage interest from his tax liability. Consult an accountant to determine whether continuing to own a property or engaging in a leaseback provides greater tax advantages.
- "Real Estate Investing for Dummies, 2nd Ed."; Eric Tyson, et al.; 2009
- Internal Revenue Service: Business Expenses