cancel
Showing results for 
Search instead for 
Did you mean: 
bigwagon
Reader

what business arrangement if tenant pays for seep tile?

What are some typical business arrangements,  when  tenant pays for seep tile?   Amortize the expense over 8 or 10 years?

Any other ideas?  

0 Kudos
8 Replies
Crossley Grain
Contributor

Re: what business arrangement if tenant pays for seep tile?

We rent several farms.  It all depends on the landlord / tenant relationship and agreement.  He have 1- 200acre farm that we rented and knew it had tile issues.  The agreement we made with them is that we rented the farm at a lower then going rate but would spend x dollars per year in tile.  Buy us paying $25 per acre less then market rent, we spent that $25 per acre per year on tile.  The great thing is, we get a dryer farm and we get to spend the money were it will best return on our investment.  As the farm gets dryer, we are still paying the lesser rent.  Once we get the farm fixed / dryed up, we have to raise the rent to market value.  These expenses are not pro-rated.  With all of this said, we have a great relationship with these folks (3 sisters) and I wouldn't do this on every farm.

0 Kudos
kraft-t
Senior Advisor

Re: what business arrangement if tenant pays for seep tile?

I know of other folks that do this. How do tenants and landlords treat this on the tax returns?

 

The tile is a capital investment not a crop expense. Do you depreciate the tile as a capital expense?

 

How about the landlord? how is this not an effort to game the tax code?  

0 Kudos
Crossley Grain
Contributor

Re: what business arrangement if tenant pays for seep tile?

As tenants we just right it off as a crop expense because for us it is truely a 1 year expense.  The landlord does nothing with it from a tax standpoint.  You have to keep things simple for most landlords.

Tags (1)
0 Kudos
Jim Meade / Iowa City
Senior Advisor

Re: what business arrangement if tenant pays for seep tile?

I have, with my CPA's guidance, several times paid for tile on a rented piece and write it off as an expense.  Of course, the landlord pays income tax on rents paid.  🙂

 

0 Kudos
Kay/NC
Honored Advisor

Re: what business arrangement if tenant pays for seep tile?

Jim, it would make sense to me that the renter would write the entire expense off as rent.  Even oif part of it is earmarked, it is still rent, due annually, and thus an operating expense. 

 

You have no control over how it is spent, and the capital improvement is on their land, so their benefit, their expense to write off.  I didn't think you could write off an improvement to someone else's asset. 

 

It would seem that the landowner reports all of the  payment as "rent." so not subject to self-employment taxes. 

 

The portion of the rent spent on tile would then be a capital expense, and either Section 179(?) treated, or depreciated over time.  Never done tile, so I do not know what schedule it's on, or if it's eligible for Section 179, but that scenario sounds right  to me. 

0 Kudos
kraft-t
Senior Advisor

Re: what business arrangement if tenant pays for seep tile?

I'm not challenging you but from this point of view a landlord receiving rent in the form of capital improvement which should be reported as income. I don't beleive that landlords can depreciate land improvements but can add it as a cost basis to the real estate should they ever sell.

 

I beleive it would be challenged by the IRS should they become aware of it. It is different when a landlord is personally operating the farm as he can take quick depreciation up to the limits. But as anon operator he subject to other restrictions.

 

Where in the Heck is Jake when we need him?

0 Kudos
tractor12
Frequent Contributor

Re: what business arrangement if tenant pays for seep tile?

sounds like a good agreement and it is working out well. Do you have your own tile equipment and do you spend the $25 per acre and stop there or do you keep going and the landlord pay you  for the additional work?   

0 Kudos
idalivered
Advisor

Re: what business arrangement if tenant pays for seep tile?

I've done this and depreciated the amount over 10 years. after 10 years it belongs to the farm, not me. I'd be willing to do it in less time because of the benefit. I also have landlords willing to pay for the tile if I install it.

0 Kudos