Clarifying Sale-Leasebacks

While possibly the most common form of sale-leaseback uses real property, other assets can be utilized in this technique to maximize benefits for the parties involved as well. This process is often used by individuals who are also business owners. The process, if used properly, will allow a fully depreciated asset to be depreciated again by the new owner, who in turn leases the asset back to the business for ongoing use and to produce a revenue stream to the new owner. If done by the business owner, the owner of the business can continue to produce benefits for themselves in their personal wealth development and financial security while enhancing their business.

For example, if the business entity (Corp., LLC, Partnership) owns an asset that it has fully depreciated, the owner of the business could buy the asset (real estate, automobile, manufacturing equipment, etc.) from the business. The owner of the business and now personal owner of the depreciable asset, leases the asset back to his/her business and is able to begin the depreciation process anew. This technique is often used prior to a sale of a business in order to provide additional benefits and revenue to a business seller.

This sale-leaseback process should only be undertaken after careful consideration of the tax consequences resulting from the sale of the asset. In order for the sale-leaseback to meet the IRS standards, the deal must meet the following five requirements.

1. The property is sold at a fair and reasonable price.
2. The lease conditions and rates reflect market values
3. The property sold has a useful life that exceeds the lease term.
4. The buyer reasonably expects to profit from the transaction
5. A valid non-tax business reason/justification exists for the transaction, such as leasing assets instead of buying them frees up capital or the sale of an asset infuses important capital into the operation.

In conclusion, when considering this technique consider the consequences of a sale, the benefits to the seller and the benefits for the buyer. In addition, depending on your specific circumstance, you should not consider only real property when thinking about a sale-leaseback, you should also think about the use of furniture, fixtures, equipment, vehicles, etc.  As with all techniques for wealth development, speak to your chosen qualified professionals and seek their guidance and input before acting. Good luck.