Hi all,
I am working on a rental real estate entity that rents two dealership buildings to a related party. The lease is a triple net lease.If the entity is subjected to the 163(j) limitation, $1.2 million in business interest expense would flow through to the partners as excess business interest expense. The entity has over $25 million in gross receipts due to aggregating gross receipts from another entity under common control. The rental real estate entity cannot elect out of 163(j) using the real property trade or business exception due to the anti-abuse rule (at-least 80% of the property is leased to a trade or business under common control). Now my question - do you think 163(j) applies to a rental real estate entity with a triple net lease?
Under 163(j)(5), business interest expense is defined as any interest paid or accrued on indebtedness properly allocable to a trade or business. Such term shall not include investment interest (within the meaning of subsection (d)).
When 199A came out, it seemed the general consensus among most was that a triple net lease would not be considered a trade or business because 199A pointed to 162 for guidance on what is a trade or business. The main court case that I can find other than Groetzinger is the 1942 Court case of Neill v. Commissioner which essentially stated the mere collection of rent without any other activity was not enough to constitute a trade or business.
Appreciate any thoughts on this.