In 2009, Lessor leases real estate to Lessee for 10 years. Lessee pays $600,000 for a building on the leased premises. The building has a fair value of $450,000.00 when the lease expires. Under the terms of the lease, upon expiration of the lease, Lessor takes possession and ownership of the real estate and the building built by Lessee. The building is not rent compensation to the Lessor. The lease expires in 2019. How much, if any, income does Lessor recognize in 2019?
Answer: Taxation of Residual Values
Residual value and salvage value are both taxable in some cases. This occurs whenever these values have not been considered for depreciation. In this case, the assets eventually have a book value of zero at the end of their useful life. If a company sells an asset with a residual value greater than its book value, the company has to pay taxes on the profits of the sale. In aforesaid case on the expiry of leae period, the Building has a fair value of $ 450000 in the year 2019 but the same has not been sold, hence no profit has been realised, hence no liability as no Income realised in the year 2019 with such a residual value of the Building leased.
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