Sale (Gift) Leaseback
Chapter 39
Tools & Techniques of
Estate Planning
What Is A Sale (Gift) - Leaseback ?
• Sale-leaseback involves a party selling property to
another party and then leasing back the same
property
• Gift-leaseback involves a party giving property to
another party and then leasing back this same
property
Copyright 2011, The National Underwriter Company
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Sale (Gift) Leaseback
Chapter 39
Tools & Techniques of
Estate Planning
When Is Use Of A Sale (Gift) – Leaseback
Appropriate?
• When a client is asset rich and cash flow poor
– Sale of a corporate asset and the immediate leaseback can
generate cash without a loss of the use of the asset
• Client earns a large amount of income, is in a high
income tax bracket, and wants to divert income to a
family member in a lower tax bracket who needs the
income
Copyright 2011, The National Underwriter Company
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Sale (Gift) Leaseback
Chapter 39
Tools & Techniques of
Estate Planning
When Is Use Of A Sale (Gift) – Leaseback
Appropriate? (cont’d)
• When a client owns property that is rapidly
appreciating and would like to save estate taxes on
that future growth
• Client is looking for an alternative to financing
business property through a mortgage
– Sale-leasebacks are off balance sheet financing, with the
lease obligation appearing as a footnote rather than a liability
– This increases the client’s business credit standing and
ability to borrow money
Copyright 2011, The National Underwriter Company
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Sale (Gift) Leaseback
Chapter 39
Tools & Techniques of
Estate Planning
What Are The Requirements?
• There must actually be a completed and irrevocable
sale or gift
• A legally enforceable lease agreement must exist
• In the case of a sale, the transaction must represent
a necessary business operation and not merely exist
to shift income tax responsibility
Copyright 2011, The National Underwriter Company
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Sale (Gift) Leaseback
Chapter 39
Tools & Techniques of
Estate Planning
What Are The Requirements? (cont’d)
• Any rent or lease amount should be reasonable
• The terms of the transaction must be arrived at in an
arm’s length bona fide manner
• If a trustee is involved, the trustee should be
independent from the grantor of the trust
– When the trust term is over, trust corpus should not return to
the grantor
• Under kiddie tax rules, to successfully shift taxation to
the bracket of a child, the child must be > age 18
Copyright 2011, The National Underwriter Company
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Sale (Gift) Leaseback
Chapter 39
Tools & Techniques of
Estate Planning
What Factors Should Be Considered?
• Are the lease provisions, especially payments, strictly
enforced?
• Does the lessee pay the entire amount of the
promised rent?
• Is the rent reasonable?
• Was the sale price equivalent to the FMV of the
property?
• A positive answer to all of these questions is required
for a successful shift of income tax burdens and
attainment of a rental deduction by the lessee
Copyright 2011, The National Underwriter Company
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Sale (Gift) Leaseback
Chapter 39
Tools & Techniques of
Estate Planning
Questions To Ask If A Trust Is Used
• Is the trust temporary?
• Will the property revert to the grantor at the end of a
given period?
• Is the trust or trustee controlled by the grantor?
• A positive answer to any of these questions will result
in taxation of income to the grantor
Copyright 2011, The National Underwriter Company
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Sale (Gift) Leaseback
Chapter 39
Tools & Techniques of
Estate Planning
Tax Implications
• For a sale-leaseback:
– The corporation that sells an asset in a sale-leaseback must
pay tax on any gain realized
– The corporation may take a tax deduction for the fair rental
paid for the use of its previously owned property
– Where the property is sold to family members, if the
installment payments are close to the rental payments by the
seller under the lease, the IRS will contend this is really a
transfer with a retained life interest
Copyright 2011, The National Underwriter Company
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Sale (Gift) Leaseback
Chapter 39
Tools & Techniques of
Estate Planning
Tax Implications (cont’d)
• Under a sale-leaseback, the lessee must report
interest income
• Lessee will be able to completely deduct the lease
payments as an ordinary and necessary business
expense
• If lessee acquires the property and then subsequently
sells it, he will be subject to recapture rules relating to
cost recovery deductions, as if he had been the
owner all along
Copyright 2011, The National Underwriter Company
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Sale (Gift) Leaseback
Chapter 39
Tools & Techniques of
Estate Planning
Tax Implications (cont’d)
• For a gift-leaseback:
– Donor receives a double benefit:
• The business tax deduction for payments of rent
• The rental income paid to the trust or beneficiary will generally
be taxed at a lower bracket than the donor’s income tax bracket
– By making an irrevocable gift of the asset, future growth is
removed from the client’s estate at no additional estate tax
cost
– There may be gift tax implications where the gift is outright or
the sales price is less than the FMV of the property
Copyright 2011, The National Underwriter Company
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Sale (Gift) Leaseback
Chapter 39
Tools & Techniques of
Estate Planning
Issues In Community Property States
• With respect to the sale-leaseback:
– If the sale price is later found to be below FMV, the amount
of the gift will be spread between both spouses if the asset
was community property
– Consider filing a gift tax return at both the state and federal
levels in the year of the sale-leaseback to start the statute of
limitations period running on any subsequent imposition of
gift taxes, interest, and penalties
• Be sure that valid legal title has passed, and that both
spouses have executed the conveying instrument
whether it is a gift or sale-leaseback of an asset
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