A sale-leaseback is a financing structure that allows corporations to transfer ownership of real estate assets and immediately reclaim the underlying depreciation expense. This strategy can provide an effective liquidity alternative to traditional debt financing or a more attractive method for a business to reinvest in its growth initiatives. How IRS Rules Impact Sale Leaseback Financing.

For many companies, sale-leasebacks can offer significant tax benefits. The primary advantage is the ability to immediately convert illiquid assets into cash that can be used for short-term needs such as paying off debt or purchasing new equipment. It can also boost a corporation’s balance sheet and improve its debt-to-equity ratio, making it more appealing to secure more favorable debt financing in the future.

Understanding IRS Rules and Their Impact on Sale Leaseback Financing

But a sale-leaseback transaction can have its own set of challenges, particularly from an IRS audit standpoint. If the IRS recharacterizes a sale-leaseback as a financing arrangement rather than a sales transaction, the original owner of the property will no longer be entitled to claim depreciation deductions and any rental payments made by the buyer/landlord will not be deductible for tax purposes as they’ll be deemed principal repayments on an implied loan.

The nuances of sale-leaseback transactions can be complex to navigate and require a thorough understanding of current tax law and the strategic objectives of the company engaging in the transaction. At Creative Advising, we provide strategic advice to clients on structuring sale-leasebacks that mitigate potential tax implications while aligning with their long-term financial planning goals.