How Ground Leases Help Landlords Mitigate Tax Liability

A successful real estate entrepreneur with an extensive background in all aspects of real estate finance and underwriting, Dean Britton serves as the principal of AIA, a leading commercial real estate financing company headquartered in New York. Dean Britton’s responsibilities include sourcing and structuring new ground lease opportunities.

Leasing land can serve as an effective way for land owners to mitigate tax liabilities due to capital gains. A landowner or landlord leases their land to a tenant (a commercial entity) in a ground lease contract. The commercial entity uses the land to develop an office building, a facility, or a warehouse for commercial business operations under the proviso that it will pay an annual rent fee on the land to the landlord, settle all tax liabilities related to property use and improvement, and return the property (including every construction on it) to the landlord when the contract expires.

Rather than selling their land, a landowner can use a ground lease contract to earn reasonable annual returns on their land for decades and maintain ownership of that land. Although the annual rents paid by tenants in ground lease contracts are low, landlords are only taxed according to the annual rents received. If a landowner sells their property outright, on the other hand, they will have to pay an overwhelmingly larger amount of tax on the capital gain.

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