Was rent taxable when individual owners leased mortgaged Florida real estate to a corporation solely owned by one lessor?

Subject

Rental of Real Property/Related Entities

Plain-English summary

The rent was subject to Florida sales tax. Two individuals leased mortgaged real estate to a corporation solely owned by one of the lessors, and the monthly rent equaled the required mortgage payments. The Department held that the narrow mortgage-debt treatment in Rule 12A-1.070(19)(c) applied only to consideration between related corporations.

Because this lease ran between individuals and a corporation, the payments could not be converted from taxable rent into nontaxable debt payments merely because of liability to a third-party lender.

What this means for you

Matching rent to mortgage debt did not make this related-party lease tax-free. The ruling treated the legal form of both parties as decisive and refused to extend the rule beyond related corporations that were equally liable as co-makers on the mortgage note.

Common questions

Q: Did common ownership make the lease exempt? No. One lessor's sole ownership of the tenant corporation did not satisfy a rule written for payments between related corporations.

Q: Did it matter that rent equaled the mortgage payment? No. That fact did not change taxable rent into a debt payment for this individual-to-corporation lease.

Q: Does the ruling establish current treatment? No. It is a fact-specific 1993 advisement that warns later statutes, rules, or court decisions may produce a different result.

Citations and references

• Fla. Stat. § 212.031 — renting or leasing real property
• Fla. Admin. Code r. 12A-1.070(19)(c) — related corporations and mortgage debt
• Fla. Stat. § 213.22 — Technical Assistance Advisements
• In re Regal Kitchens, Inc., 15 F.A.L.R. 1467 (Fla. Dep't of Revenue Mar. 1993)
• State ex rel. Szabo Foods v. Dickinson, 286 So. 2d 529 (Fla. 1974)

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 93A-012

Original ruling text

Title:

Rental of Real Property/Related Entities

Apr 02, 1993

RE: TAA 93A-012
Sales and Use Tax on Rental of Real Property
by Related Entities
s. 212.031, F.S.
Rule 12A-1.070(19)(c), F.A.C.

Dear :

Your letter of December 21, 1992, requested a Technical
Assistance Advisement on the application of the sales and use
tax to the above referenced matter. This response to your
request constitutes a Technical Assistance Advisement under
Chapter 12-11, Florida Administrative Code, and is issued to you
under the authority of s. 213.22, Florida Statutes.

FACTS

(Lessors) (husband and wife), entered into a lease
agreement with (Lessee), on December 1, 1992. On that same
date, XXX and XXX entered into a Promissory Note in the amount
of $850,000; said Note is secured by a mortgage of the leased
premises. (Lessor), is also the sole shareholder of (Lessee).
The parties have executed the lease which provides for rent
payments to be equal to the same amount as the required monthly
loan payments under the terms of the existing mortgage loan
agreement.

DISCUSSION AND DETERMINATION

Section 212.031, F.S., provides:

"(1)(a) It is declared to be the legislative intent that
every person is exercising a taxable privilege who engages
in the business of renting, leasing, letting, or granting a
license for the use of any real property ..."

Rule 12A-1.070(19)(c), F.A.C., provides, in pertinent part
as follows:

"(c) The total consideration furnished by one corporation
to a related corporation for the occupation of real
property ... is subject to tax ... However, such
consideration is not rent but the payment on a debt if the
corporation furnishing the consideration is as equally
liable on the debt secured by the real property as the
related corporation; any amount furnished to the related
corporation over the amount legally necessary to amortize
that debt is subject to tax unless specifically exempted by
statute."
The Department has determined that if the two parties to a
lease transaction are an individual and a corporation in which
the individual is the sole shareholder of the corporation, then
the transaction does not qualify for the exemption under Rule
12A-1.070(19)(c), F.A.C., since the exemption contained in the
Rule addresses consideration paid between related corporations,
not consideration paid between an individual and a corporation.
Additionally, there is no basis for exempting consideration paid
between an individual and a corporation in the statutes.

Upon review of the enclosed lease and mortgage agreements documents evincing the relationship between lessee and lessor,
and the relationship and status of both such entities to the
leased real property - and conversations with XXX, it is the
Department's position that the aforementioned leasing
transaction is not exempt from sales tax liability, under Rule
12A-1.070(19)(c), F.A.C., since the exemption only applies to
consideration paid between related corporations, and not between
individuals and corporations.

Please be advised that there is no basis in the statutes
for converting rent payments, made pursuant to an enforceable
lease between related entities, to non-taxable debt payments
because of joint liability to third parties. However, since the
exemption contained in Rule 12A-1.070(19)(c), F.A.C., has been
duly promulgated, it will be respected until it is repealed.
Nevertheless, the application of the Rule will not be expanded

beyond the its express terms.

The Department has recently held In RE: Regal Kitchens,
Inc., 15 F.A.L.R. 1467 (Fla. Dept. of Revenue, March 1993), that
the express terms of the Rule treats rental payments as nontaxable debt payments if the related corporations are as equally
liable on the leased property's mortgage debt. It is the
Department's position that the required narrow construction
(see, State ex rel. Szabo Foods v. Dickinson, 286 So.2d 529
(Fla., 1974), in the Rule must be limited to related
corporations which are co-makers on the note secured by the
mortgage debt.

This response constitutes a Technical Assistance Advisement
under s. 213.22, F.S., which is binding on the Department only
under the facts and circumstances described in the request for
this advice as specified in s. 213.22, F.S. Our response is
based on those facts and the specific situation summarized
above. You are advised that subsequent statutory or
administrative rule changes or judicial interpretations of the
statutes or rules upon which this advice is based may subject
similar future transactions to a different treatment than
expressed in this response.

You are further advised that this response and your request
are public records under Chapter 119, F.S., which are subject to
disclosure to the public under the conditions of s. 213.22, F.S.
Your name, address, and any other details which might lead to
identification of the taxpayer must be deleted by the Department
before disclosure. In an effort to protect the confidentiality
of such information, we request you notify the undersigned in
writing within 15 days of any deletions you wish made to the
request or the response. Please note that we already have in
file some documents evincing some desired deletions.

Sincerely,

Nydia Men‚ndez
Technical Assistant

NM/pb
Con. #6215