Sidney owns unimproved land in Chicago, Illinois. In 2005, Sidney leased the land for 10 years to the U-Store-It Storage Company. The lease terms require annual lease payments of $12,000 that are paid at the beginning of each year. U-Store-It immediately constructed a storage facility on the leased land. The storage facility building was worth $105,000 when it was constructed. In 2014, the lease expires and legal ownership of the building reverts to Sidney. The building is worth $125,000 when the lease expires. Sidney has reported the lease income annually, but will not report any income from the improvements the lessee made to the building. Explain in terms of the income tax concepts why Sidney has reported his income in this manner.

Question

Quizplus · Accepted Answer

The Answer of Sidney owns unimproved land in Chicago, Illinois. In 2005, Sidney leased the land for 10 years to the U-Store-It Storage Company. The lease terms require annual lease payments of $12,000 that are paid at the beginning of each year. U-Store-It immediately constructed a storage facility on the leased land. The storage facility building was worth $105,000 when it was constructed. In 2014, the lease expires and legal ownership of the building reverts to Sidney. The building is worth $125,000 when the lease expires. Sidney has reported the lease income annually, but will not report any income from the improvements the lessee made to the building. Explain in terms of the income tax concepts why Sidney has reported his income in this manner.

Sidney Owns Unimproved Land in Chicago, Illinois