Tax Consequences of a Cell Tower Lease
Be wary of tower company agents that try to pass themselves off as tax experts. Expect to see advice dispensed despite disclaimers that they can not provide tax advice. Some cell tower companies may advise that their particular offer with Cell tower lease rates qualifies to be treated as capital gains as opposed to regular income. By the end, you will likely be pretty confused about the tax implications of the sale of a lease on your parcel. It is important to understand the tax consequences of a cell tower lease before you finalize any contract.
There is no one size fits all answer to the question of how a cell tower lease will impact your taxes. The answer will vary based on your current income and investment portfolio. It is highly recommended that a landowner has any deal reviewed by their CPA or tax adviser. A cell tower company can make claims, but your individual situation will either validate or dispute those claims. The landowner will be left to answer at tax time.
Below we will discuss the 2 most common methods for handling a cell tower lease. Which route a landowner goes should be determined by a tax professional.
- Capital Gains Tax – If the lease buyout is treated as a sale of a permanent land interest, the income can be claimed as a capital gain. The length of time you have owned the lease is relevant for tax purposes. If you have owned the lease less than a year, it is considered a “short-term” capital gain and you can expect the tax bite to be significantly higher than “long term.” The term increase can be as much as 20%. The benefit of capital gains treatment is that it will not increase your income. If you are in the 25% bracket, it can be taxed at 15% as it mirrors the ordinary income tax rate.
- Income Tax – If the lease buyout is treated like the prepayment of a lease, it will be treated as normal income. Your individual income and the length of time you’ve held the lease will determine if the sale of the lease should best be treated as income.
We can not stress enough how important it is to have your contract reviewed by a tax professional before signing a letter of intent. Cell company agents and tower companies do not know your individual financial situation but will use tax handling as an incentive anyway.