Is the income from a lease buyout taxable?

[joelsams]

My business leases an office space. We have a 10-year lease in place. Our building just sold to new owners. Our new landlords want to utilize all the space in the building, thus they would like us to leave, but can't just kick us out due to our long lease. They offered to "buyout" our lease agreement. That is, pay us to change/cancel the lease and move our operations elsewhere. If we take the deal, would the payments we receive be taxable income? Capital gains? How do we figure out taxes on that?

[DDollar · Accepted solution]

The proceeds received from a lease buyout are definitely taxable.  The more complicated question is whether or not it is treated as "Other Income" or Capital Gain. 

In some cases the tenant can receive favorable capital gain treatment on the lease buy out. Sec 1241 - states that amounts received by a lessee for cancellation of the lease shall be considered as amounts received in exchange for such lease or agreement. Therefore if the lease is a section 1231 asset, the tenant could recognize the lease termination income as capital gain.  Generally a lease held for use in a tenant's business is considered section 1231 asset. However in order to receive this treatment the tenant would need to have had the lease over a year and give up all ownership rights to the leases - meaning subleases or other rights of re-entry would not qualify the tenant for capital gain treatment.

[Znap]

If you are 74 and retired do you still

have to pay taxes or file taxes for the buyout. Lived on property for 24 years. 

[Tmac-fa]

Re age 74 and 24 yrs in residence, Income is fully taxable no matter your age or length of time residing on the property. 

[Vanessa A]

Yes, if they bought out a lease and you were not selling a property, regardless of your age or time that you lived there, you would need to include this as taxable income.  The factors that would affect whether or not you need to file a return are if your total taxable income with the buyout is greater than your standard deduction

To enter your income from the buyout click the following:

• Federal
• Income and Expenses
• Scroll down to Less Common Income and click Show More
• Start next to Miscellaneous Income
• Start next to Other Reportable Income

This will put it on line 8z of your schedule 1 as other income. 

Your standard deduction if single would be $14,350 and if Married Filing a joint return with you both over 65 would be $28.700.  If your total taxable income falls below the above amount, you would not need to file a return. If it is greater than your standard deduction, then yes, you will need to include the buyout and all other income on your return. 

Depending on your total other income, the amount of your social security that is taxed will be 50% or 85%. 

The easiest way to determine if you need to file, if you are unsure is to walk through the TurboTax questions and enter all of your income.  Then look at line 15 of your return.  If it is $0, you will not need to file a return.  If it is more than $0, you will need to file a return.

You can see your 1040 by selecting the following:  Tax Tools>>Tools>>View Tax Summary>>Preview My 1040.