Client Erecting Building on Leased Property

My client has signed a 20 year lease with our local city government for 80 acres of unimproved land. The lease payment is $2,000 per year. He is installing a recreational sporting clays shooting range. He has spent over $175K clearing the land, bringing in utilities, and moving in portable buildings and machinery and equipment to get the range up and running. He is now drawing up plans to build a permanent 2,000 sq ft "lodge" on the property. Cost will be another $150K at a minimum.

What do I need to learn (know) to help advise my client. What red flags do you see?

Are the cost of expenditures that are permanently attached to the land (clearing, utilities, etc) considered Leasehold Improvements. If so how are they depreciated?

Is the new Lodge considered a Qualified Improvement Property? (The city is not restricting the construction in any way)

A client posed a similar situation question to me recently.

Client might lease farmland and get into the cattle raising business. The land would be unimproved grazing land.

Client would erect fences, and other buildings/improvements necessary. It's my understanding the agricultural fences would be 7 year property both pre and post TCJA.

I understand the land improvements and real property would be property of the landowner once the taxpayer discontinues the lease, so speaking to an attorney as well is advisable.

I'm assuming my client can expense/bonus/depreciate these capital expenditures on his tax return?

Any heavy hitters want to weigh in on this? Even if it's a hunch, theory, late night beer/whiskey fueled ramble?

I haven't been able to find any guidance, but it 'feels' like my client should be able to expense/bonus/depreciate these items while he holds the lease. When lease is terminated and my client vacates the land, any remaining basis would be a loss on disposal? The land owner would theoretically have unrealized appreciation as the land was improved and would realize the value increase if the land was ever sold.

There’s no special here about this being a land lease. If your client makes improvements to the land, you’d depreciate those in accordance with normal depreciation rules that apply to that type of property.

When lease is terminated and my client vacates the land, any remaining basis would be a loss on disposal?

That’s how it works when you terminate a lease.

You can get into some tricky situations involving land leases, but I don’t see those here. You can also get into tricky situations if you make an improvement to leased property and related parties are involved. Think about it: A five-year land lease is signed between you, the landowner, and your wholly-owned S-corp. Your S-corp builds a building on the land. The land lease terminates after 5-years and the S-corp vacates the premises. S-corp writes-off, as a loss, the undepreciated basis of the building. Basically, you just depreciated a building over 5-years. Will it work?

I can't cite an authority off the top of my head, but you as the individual, whether directly or indirectly, owned the building before and after the lease termination. The transaction has the potential for abuse. Doesn't seem like it will.

Thanks Jeff!

When lease is terminated and my client vacates the land, any remaining basis would be a loss on disposal?

That’s how it works when you terminate a lease.

It's true, and worth noting that it would be an (ordinary) abandonment loss.

There's nothing oficial about this article, but it's a decent summary of some of the issues. https://www.plantemoran.com/explore-our ... provements

I deal with ground leases often. If Mammondee the OP still needs an answer he/she can feel free to PM me.

Why PM? Can't we all benefit from your answer?

I think the OP double-posted. I recall answering a more detailed version of the same question a couple of months back.

IME people get confused when someone hijacks a thread and people answer one of the posters and not the other, thinking they have the right answer but it's to the wrong question. Why in this situation I prefer PM.

Kind of defeats the point of a forum like this one.

Lind of defeats the point of a forum like this one.

Totally agree.

It’s evident that mammondee abandoned his or her 7/25/18 thread (since no one responded by 8/28/18), hence mammondee’s new thread dated 8/28/18 (see below, which is what Coddington referenced). Not sure how you can have a hijacking of an abandoned thread. Moreover, ManVsTax posted on 9/23/18, nearly 2-months after 7/25/18.

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