Ground Lease or Ground Rent Tax Deduction for Income-Producing Real Estate Property

Definition of "ground rent": The rent earned by leased land. Ground rent received is taxable as ordinary income when received. If the lease is considered a financing device, portions of the rent may be treated as interest, gain, and nontaxable recovery of investment. If ground rent is a financing device, it is treated as a mortgage payment.

One of the most valuable and continuing big tax deductions year in and year out is to for the owner of an income-producing building and land improvements to pay annual ground rent or lease payment to the landowner for the privilege of keeping the owner's buildings and improvements on the leased land. In terms of a house and lot, the term "ground rent" means that you own the house, but someone else owns the actual property that the house sits on; therefore, you must pay the owner rent on that land.  This  ground rent tax saving strategy is of especially-high value when the landowner is a taxpayer in in a lower tax bracket (such as minor children, an irrevocable trust, a tax-free pension plan, or an offshore entity in a no or small tax haven.

The concept of ground rent as being a separate rent from building rent was explained in the most famous book ever written on economics---An Inquiry into the Nature and Causes of the Wealth of Nations, written by Adam Smith and Germain Garnier, and published in 1852. The following discussion on ground rent appears in this classic economics book at page 356---"In ascertaining what part of the rent ought to be considered as ground-rent, and
what part ought to be considered as building-rent, it should not, however, seem very difficult to distinguish these two parts of the rent from one another."

The amount of annual ground rent is the arithmetical result of multiplying the fair market value of the leased land by a fair return rate on invested capital---such as 8 to 10% for properties located in the U.S.A.

The value of the leased land can be determined by having a qualified appraiser do an expert appraisal of the land as a separate appraised value---separate from the buildings and land improvements.

The land (without building and land improvements) can be deeded to the desired landowner with the deed grantor retaining the ownership of the depreciable buildings and land improvements.

The paying of ground rent by home owners to a separate land owner is very common in Baltimore, Maryland, USA, and in the United Kingdom.

Phillip Fry, Certified Tax Consultant, can assist you in arranging ground leases and ground lease tax deductions.  To schedule your initial tax consultation with Mr. Fry, please email Phil at incometaxplanning@yahoo.com, or phone him 63-906-510-4000,
63-919-375-0302, or 63-35-226-3154 (Philippines) 7 p.m. to 7 a.m. Eastern Time (Canada/USA time), or send a fax to
FAX 63-35-226-3219
 

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