Financial Leasing and Tax Considerations for Real Estate Investors
Leasing is a fundamental and common expense to exercise any activity which is considered a deductible expense as soon as it is related to the activity and supported by documentation, and it is used to extend tools for business finance, that provide advantages to either acquire assets And buildings without the need to obtain loans or issue treasury bonds This faces tax implications which must be observed as follows:
Operating Leases
For Lessors:
| Items | Tax Treatment |
| Operating revenue | Included in taxable income |
| Interest revenue | Included in taxable income |
| Included in taxable income | Considered as a deductible expense |
For Lessees:
| Items | Tax Treatment |
| Amortization of assets of usufruct | Non – deductible |
| Interest expenses | Non – deductible |
| Lease expenses | Allowed to deduct amount paid each year |
Finance Leases
For Lessors:
| Items | Tax Treatment |
| Finance revenue | Included in taxable income (amount received each year) |
| Cost of finance | Fully deductible (as a core activity) |
| Interest expenses | Fully deductible (no limitation) |
| Provisions of finance | Deductible is limited to certain condition |
| Bad debt | Limitation on deductible |
| Stamp tax | Considered as a deductible expense |
| WHT | Doesn’t applicable |
For Lessees:
| Items | Tax Treatment |
Amortization of the Right to use.
(lease contracts) | Considered as a deductible expense |
| Interest expenses | Considered as a deductible expense |
A controversial issue that may arise concerns the most advantageous method for stakeholders to purchase buildings from a tax perspective. The options include obtaining loans, issuing treasury bonds, or taking out a mortgage.
Conclusion
Leases can significantly impact taxation for both lessors and lessees, influencing cash flows, profitability, and financial reporting. It’s essential for individuals and businesses engaged in leasing activities to carefully consider the tax implications and seek professional advice to optimize tax strategies and ensure compliance with applicable regulations. By understanding the nuances of lease taxation, stakeholders can make informed decisions to effectively manage their tax liabilities and enhance overall financial performance.
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