Read the Contract

 

Today TaxMama hears from someone with an endless set of questions. “It started out as a question about a lease buyout, which turned out not to be about an equipment lease, but a landlord-tenant lease, which turned out to be about a tenant-former tenant thing, which…”

 

Dear Family,

When it comes to getting answers from anyone about any tax issue, it really helps if you:

1)      Be as specific (and brief) as possible about the details.

2)      Understand the situation.

3)      Read the paperwork involved.

After wasting most of the morning in a back-and-forth email conversation, the situation still made no sense. It turns out someone paid $7,500 to buy out a former tenant’s lease on some office space, including the lease extensions – but the former tenant had a month-to-month lease.

It helps to understand that a month-to-month lease is meaningless. You are there at the landlord’s pleasure. The landlord may provide 30-day notice at any time and kick the tenant out. There are no protections against rent increases or anything else. In fact, generally, without the landlord’s consent, tenants may not turn over their lease to another tenant – even if there is a clause allowing them to sub-lease. All such clauses require landlord approval of new tenants.

So what could this person be paying $7,500 to get? Without reading the signed contract, and the underlying lease contract, there’s no way of knowing, is there?

Magically, once you read the paperwork, the situation can become crystal clear. Then the accounting treatment of a transaction is much easier to determine, isn’t it?

Today’s lesson – always read the contracts, trusts, or other documents underlying any transaction that isn’t immediately clear.

And remember, you can find answers to all kinds of questions about due diligence and other tax issues, free. Where? Where else? At www.TaxMama.com.

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