Triple Net Lease

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I'm unclear on this concept and hope someone can help me out.

When tenants pay for expenses, is this considered income on your return?

Say your rental income is $100,000. Expenses are $40,000. Would you declare $140,000 total income, then still deduct the expenses, giving you net income of $100,000? What am I missing here?

Thanks so much,

Tracy

Comments(6)

  • Worf27th January, 2004

    You need to speak to an accountant. Income is money coming in. Expenses are costs associated with that income (money going out). Net income is the result when you subtract expenses from income.
    In your example, if $100,000 was your only income, and $40,000 was your only expense, your net income would be $100,000 minus $40,000 or $60,000.

  • TracyH27th January, 2004

    Thanks for the reply, Worf. Here's where I'm confused:

    My minimal understanding of a triple net lease is that the tenants pay for expenses, taxes, insurance, etc. Tenants cut you a check for this, so this money is coming in. If I do not declare this money as income, and also deduct the expenses, then I would be taking in $140,000 but stating net income as $60,000. This doesn't seem right.

    Any help is appreciated,

    Tracy

  • DaveT27th January, 2004

    Your rental income is $100K, your expenses are $40K. Your lease agreements call for the tenants to reimburse you for your expenses.

    Regardless of how you keep your books, you are only taxed on your net income.

    If you are a cash basis taxpayer, you can either:Report $140K rental income and $40K expenses for a net income of $100K, or,
    Report $100K income with no expenses if all expenses were fully reimbursed. The net amount of any expense not fully reimbursed would be claimed on your tax return this year, and then a credit against the expense would be shown next year when you receive the tenant reimbursement.I use the second approach. My bookkeeping approach is to enter all rent received and all expenses paid. As I receive reimbursements from my tenants, I debit the expense account and credit cash. At the end of the year, my tax return shows all the rental income received and only my actual net out-of-pocket costs for expenses.

    I don't see this as a tax question, but a bookkeeping question. Perhaps you might want to address this question in the Commercial Forum.

  • TracyH27th January, 2004

    Hi Dave,

    Thanks very much for the information. In the future, I'll remember to post such questions in the Commercial Forum.

    Tracy

  • DaveT27th January, 2004

    Tracy,

    I am sorry that I misspoke in my earlier post. You asked a tax related question and correctly posted it in this forum.

    I see that the root of your issue is really a bookkeeping question -- and since you are dealing with NNN leases -- that may get a better response from someone in the Commercial forum where NNN leases are done all the time.

  • TracyH27th January, 2004

    Hi Dave,

    Your comments are always appreciated. I've been learning so much here and visit the site almost every day.

    I really wasn't sure where to post the previous question, and now I have others related to the 1065 return. Maybe I'll try over in Commercial and see how it goes.

    Thanks again,

    Tracy

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