Guide to Tenant Improvements Depreciation

Even if you're not the one who improved a rental property, the improvements that have been made to it increase the value of the property. You can't usually deduct the cost of leasehold improvements for this very reason! This is especially true if you didn't pay for the improvements in the first place. Instead of getting nailed with a large tax bill, however, most taxing agencies will allow you to depreciate these improvements over time. The rates depend on tax codes and what the improvements actually happen to be.

Is It a Leasehold Improvement? Or a Building Improvement?

Building improvements are different because they depreciate over the lifespan of a building. To determine if you've got a leasehold improvement, there are three specific criteria that must be met. The first is that it must be the tenant or the landlord/owner of the property that made the improvements to the space in question. The work must also be completed within the walls of one tenant's space and not benefit any other tenants. The building must also have been used for a minimum of three years in most circumstances.

If you cannot answer in the affirmative to those three stipulations, then what you have is a building improvement and you won't receive credit for any tenant improvements. If you can pass this three question test, however, then you have the ability to claim the depreciation: with one exception.

Depreciation Is Awarded to Those Who Make the Improvements

Whomever does the work to improve the space is the party who will get to claim the write-off for the improvements. If a tenant solely performs all of the improvements on their own, then they get to take the full amount of the depreciation. If a landlord is the one who invested in the property, then they will get the depreciation instead. If both parties did the work, then they may get to take their portion of the investment and depreciate it.

The improvements depreciate is a straight line over 15 years at the time of this writing. This is subject to change annually based on local, regional, and national tax codes. You may also depreciate a bonus of up to half of the cost of an improvement in the first year of the project or claim expenses of up to $250k of the total cost.

What If a Tenant Leaves Before the Depreciation Period?

Sometimes a tenant will stay in the same place for decades at a time. At other times, a leaseholder may be in and out of a property in less than 24 months. If improvements get left behind by a tenant before they have fully depreciated, then whomever made the investment into the building will get to write down the full value of the investment to zero on the next tax filing. That means someone leaving after two years after improvements were made would allow the landlord who made the improvements to fully depreciate 13 years of depreciation on their next filing.

These rules are subject to change, so be sure to check your local laws so you know what the specific depreciation rules in your community are.
Posted on Jul 24, 2014


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