California Real Estate Practice Exam

An owner of a business property sold the property and then "leased it back." Which of the following factors was most advantageous for the owner/lessee?

1. Has an improved tax situation, with all rent payment being deductible from income

2. Now has more working capital at his disposal

3. Was relieved of property management

4. Does not have to be concerned about property taxes on the building in the future

The correct answer is: Has an improved tax situation, with all rent payment being deductible from income

The most advantageous factor for the owner/lessee who sold and then "leased back" the business property is that all rent payments are now deductible from income, which improves their tax situation. This arrangement allows the owner to convert their former asset (the property) into cash, while treating the rent as an expense, thereby reducing taxable income. This can be particularly beneficial for cash flow management and may allow the owner to reinvest those savings or use them for other operational needs, enhancing overall financial flexibility. Considering the other factors, while having more working capital can be a benefit, the immediacy and direct impact of the tax deduction from rent payments usually carries more weight in terms of financial strategy. Similarly, being relieved of property management responsibilities is advantageous but doesn't directly impact the owner's cash flow in the way that tax deductions do. Not having to worry about property taxes is also helpful, but again, the tax deductibility of rent typically offers more immediate financial benefits.