OldStandard
Expert
Is the SPIA premium paid by a commercial tenant to enhance the security of his lease payments on real property to his landlord annuitant, tax deductible for the tenant?
Is the SPIA Premium Paid by a Commercial Tenant Deductible?
- Thread starter OldStandard
- Start date
- 924
I assume this was a firm requirement by the landlord in order to get the lease, is that correct? Does the tenant have any rights as owner of the annuity?
I trying to get my mind around the concept here. The landlord is the annuitant, not the tenant? Is the SPIA for a fixed term -like in line with the term length of the lease agreement?
I trying to get my mind around the concept here. The landlord is the annuitant, not the tenant? Is the SPIA for a fixed term -like in line with the term length of the lease agreement?
- 711
I don't see how the annuity enhances the security of a lease.
Are you using an annuity as a bond?
Are you using an annuity as a bond?
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- #4
OldStandard
Expert
Thank you for your help. The Landlord would not agree to the lease without the enhancement. Yes, the landlord is the annuitant, and not the tenant. The SPIA is for a fixed term -in line with the term length of the lease agreement. The annuity enhances the security of the payments to the landlord because the insurance company is much less likely to default than the tenant.
- 924
Since the cost of a SPIA is directly related to the age of the annuitant, I would hope the landlord is getting on in years.
Anyway, as to your question. Necessary expenses directly related to the operation of a business are ordinarily deductible. Since the annuity is required, it sure seems like it is a necessary expense.
Disclaimer: annuities are only as good as the claims paying ability... Wait, I mean I am not a CPA.
Anyway, as to your question. Necessary expenses directly related to the operation of a business are ordinarily deductible. Since the annuity is required, it sure seems like it is a necessary expense.
Disclaimer: annuities are only as good as the claims paying ability... Wait, I mean I am not a CPA.
- 10,826
Actually a traditional fixed period SPIA is just based on the current interest rate. Since it is for a fixed period and not for the Annuitiants lifetime, age does not matter.
- 924
Yep, yep. That is right. My brain is hardwired to think lifetime payout.
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There are several things about the concept of using a SPIA to "guarantee" a lease obligation that could be problematic.
Let's say that the tenant has to buy a 5 year SPIA to cover a commercial lease that is $3k per month. That would be, I assume, an $18,000 annuity ($3k x 12 x 5).
How exactly does this work? The annuity is paying out slightly more than $3k per month since, as we know, the spread on SPIAs is very thin. Obviously you would want to calculate the monthly payout necessary to generate $3,000 and thereby reduce the SPIA a bit. It would be interesting to run the figures, but let's just say it would take $17k in premium to generate the necessary lease amount
However you look at it, the tenant is really just paying his lease up in advance. Yes, the payment for a SPIA up front would be less than paying the whole lease in advance, but really -in the scheme of things the tenant would just be paying in advance.
Maybe the landlord's son is a producer? There has to be some angle here.
And does the tenant really want to have to take all the deduction in the year the SPIA is purchased instead of over the years of the lease? That could outweigh the slight reduction in lease costs versus SPIA costs. And what about the lost opportunity costs of paying a large sum in advance. What other business expenses, like marketing opportunities, would be lost by paying a large sum up front?
Do you get into amortization issues as opposed to deduction issues? Again, I'm no CPA.
If I ran into this situation as a tenant, I think I would pass.
- 15,041
You dropped a zero. It would be 180k for 5 years at 3k a month.
I'm with you, I'd pass as a tenant. If the tenant can buy a SPIA for 180k in order to secure the lease, then the tenant is perfectly capable of paying the rent as it comes due.
I would be very suspicious the landlord is up to something.
Also, what is the tenant's protection against being evicted? The insurance company is going to keep paying the annuity payments.
- 924
Exactly -very good point. There are many legal reasons to evict someone other than failure to pay rent. I would bet the farm that the lease provides that in the event of default by the tenant, the landlord gets to keep all the rent.
Talk about motivation to pounce on any little variance by the tenant in the lease terms as an excuse to evict.
- 15,041
Were I the tenant, able to come up with 180k down and really wanted the property in question, I'd offer to put it in escrow or a trust account with a bank or attorney.
Let the attorney or bank cut the check every month for the rent. I have no idea what that would do concerning taxes and deductions and I'm sure there would be a fee for it, but it definitely would better protect the tenant.
As it is structured, it is too easy for the landlord to take advantage of the situation. And quite frankly, I don't trust the landlord. I believe he is up to something nefarious. Why in the world would he suggest an annuity??? I think his go to would be the escrow account.
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