Tax Treatment of Leasehold Improvements

by David Roberts ; Updated July 27, 2017

A leasehold Improvement, also referred to as a tenant improvement, is a change or alteration in the structure of leased property to meet the needs of a tenant. These changes are particular to walls, shelving and the interior structure of the building.

Depreciation of Leasehold Improvements

Prior to 2004, any substantial improvements were depreciated over 39 years. Thirty-nine years is the IRS-designated useful life of a building being leased. The useful life of leasehold improvements is 5 to 10 years. This is also the average commercial-lease term according to the Commercial Real Estate Development Association. In 2004, legislation was introduced to reduce the period of depreciation of improvements from 39 years to 15. This allowed landlords to modernize their buildings every 15 years instead of every 39, and to write off 2 1/2 times the rate of depreciation.

Improvements in Lieu of Rent

Sometimes a landlord will exchange rent for leasehold improvements provided by the renter. This arrangement must be detailed in the lease agreement to be legal; the costs of the improvements are considered rental income to the landlord. This creates an income for the landlord when there has been no cash exchanging hands.

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Improvements for Partial Rent

The lease can be drawn up to grant a credit to the renter toward any amounts he might spend in leasehold improvements. This would benefit the landlord in that the taxable income for rent will be reduced. The amounts spent for these improvements can be deducted from any capital gains on the future sale of the leased building.

About the Author

David Roberts has been writing since 1985. He has published for various websites including online business news publications. He has over 11 years experience in tax preparation and small business consultation. He is also a Certified Fraud Examiner. He received a Master of Business Administration from Florida Metropolitan University in 2005.

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