Opting for a cell tower lease buyout is a great way to get a lump sum of cash and free yourself from an existing lease, but it also comes with its own set of complications. One of the many factors that landowners do not consider is the tax implications of selling a cell tower lease. In truth, there is no precise formula that will tell you exactly how much you will owe in taxes; it can vary from one sale to another. That said, there are certain considerations and strategies that you, a tax professional, and a cell tower consultant can work out together to make sure you get the best possible outcome when you file your taxes.
In today’s guide, we will answer some of the most pertinent questions related to cell tower lease sales and the resulting tax obligations. Additionally, we will offer our advice on how to minimize your tax burden while maximizing your lump-sum buyout. But before we get ahead of ourselves, it is important to understand exactly how a cell tower lease buyout works.
Understanding The Cell Tower Lease Buyout
Let’s say that a cell service provider approaches you and makes you an offer to install a cell tower on your property. You may even get multiple offers if your land or building is in an underserved area. In any case, you choose the best offer, sign on the dotted line, and begin your lease agreement. From then on, the cell service company has to pay you (per the contract) for the use of your land. Leasing your land to a cell tower provider provides a great way to have a steady cash flow for the foreseeable future.
However, what happens if you want to sell your land or you simply receive a great lease buyout offer? This is when you should consider a cell tower lease buyout. In essence, you sell the lease in exchange for a lump-sum amount, typically equivalent to 15-20 years of the lease value. So, rather than collecting much smaller amounts of money through lease payments every month, you can get a much, much larger sum now by assigning the rights of the cell tower lease to the new investor.
There are plenty of reasons to opt for a cell tower lease buyout, even if you are relatively happy with the current terms of your lease agreement. Perhaps you want to be more liquid and use the lump sum to pursue other investments, or maybe you want to simplify your finances by selling off your existing lease. Either way, a cell tower lease buyout gives you the power to put the lease in someone else’s hands and get a huge payout at the same time.
However, it goes without saying that this will have a profound impact on your short-term tax liabilities. If you are leasing a portion of your property in exchange for monthly payments, those payments will typically be taxed as regular income. Depending on your tax bracket and various other factors, this could mean that your immediate tax obligations are relatively low. However, if you sell your lease for a lump sum and it is treated as regular income (more on that later), you will likely need to pay a much larger amount for the tax year in which you receive the funds. We will go over how the IRS usually treats cell tower lease buyouts in the next section.
How Cell Tower Lease Buyouts Are Taxed
The money you receive from cell tower lease buyouts is usually treated in one of two ways. It can either be taxed at the capital gains rate (which is usually the better option, particularly if you have held the lease for more than one year prior to the sale) or it can be taxed at regular income (a much higher rate). Naturally, there are dozens of different factors that can dictate how the IRS will view your buyout taxation.
Here are just a few important factors that can affect the tax rate and your total tax liability after a cell tower lease buyout:
- Location – While federal taxes will largely remain the same regardless of your location, each state has its own laws and tax rates for cell tower lease sales. You will have to work with a tax professional to learn more about how these sales are treated in your home state.
- Type of Sale – Selling your lease as an easement, selling permanent land, or choosing a buyout for accelerated lease payments can all affect the final tax rate.
- Lease Years Covered – When an investor buys out your lease, they guarantee coverage for a specific number of lease years. The length of this coverage can affect how the IRS taxes you.
- Transaction Structure – Finally, the structure of your buyout transaction can have a major impact on your taxes. You may choose to get the lump sum all at once or spread it out over multiple tax years. This will certainly affect how much you owe when you file your taxes.
Using The Cell Tower Sale Proceeds For a 1031 Exchange
Generally, it is more advantageous for landowners to have their cell tower lease buyout taxed as capital gains. The rate is almost always lower, plus many buyouts meet the requirements for a 1031 exchange, which allows the landowner to defer the payment of taxes. In essence, IRS code 1031 allows certain taxpayers to defer tax payments on the sale of investment property if the proceeds from the sale are reinvested in a similar property within a set period of time.
Thus, a 1031 exchange is the ideal situation for landowners selling their cell tower leases, as they can benefit from lower capital gains rates while also deferring their tax payments. In any case, navigating the requirements of a 1031 exchange or any kind of buyout tax obligation requires the assistance of both a cell tower lease consultant and a high-quality tax professional.
Why You Need Both A Tax Professional & A Cell Tower Consultant
Taxes are complicated enough, but when you throw a lump-sum cell tower lease buyout into the mix, they become far more complex. More importantly, the ramifications of approaching the situation without the right information can be enormous. It could mean the difference between paying a relatively small amount in capital gains taxes years down the road or paying a huge amount in regular income taxes within a few months of the sale. Therefore, it is vitally important to consult with both a tax professional and a cell tower lease consultant.
Most tax professionals will be well versed in the details of 1031 exchanges, capital gains taxes, and structuring large transactions to minimize your tax burden. However, it is also important to work alongside a cell tower consultant from the start. Why? Because a consultant knows the ins and outs of a cell tower lease buyout, particularly when it comes to negotiating a deal in accordance with the advice of your tax professional. This way, you have two experts working to find the best structure for your transaction.
Are you a property owner who wants to sell your cell tower lease? Are you interested in a cell tower lease buyout, but are worried about the potential tax implications? If so, be sure to contact the experts at Nexus Towers today!