Understanding Tenant Buildout Depreciation
Office tenant buildouts represent significant landlord investments that qualify for accelerated depreciation through cost segregation. When landlords fund tenant improvements, they acquire depreciable basis in components including partitions, flooring, ceilings, specialty electrical, and built-in millwork.
The distinction between building components and tenant improvements affects depreciation treatment. General building systems depreciate as part of the building structure, while tenant-specific improvements may include higher proportions of accelerated depreciation property.
Lease term should not automatically determine depreciation period. While accounting treatment may spread buildout costs over lease term, tax depreciation follows asset class lives. Cost segregation identifies components with 5-year, 7-year, or 15-year tax depreciation regardless of lease duration.
Multiple layers of improvements complicate depreciation tracking. Original building finishes, subsequent landlord improvements, and current tenant buildouts each have separate placed-in-service dates and depreciation schedules requiring proper documentation and tracking.
Maximizing Buildout Depreciation Benefits
Cost segregation studies on significant tenant buildouts identify components qualifying for accelerated depreciation. Interior partitions, specialty lighting, flooring, and millwork typically qualify for 5-year or 7-year treatment rather than 39-year building depreciation.
Qualified improvement property rules may apply to interior buildouts meeting specific criteria. Improvements to interior, non-structural portions of nonresidential buildings may qualify for 15-year depreciation and bonus depreciation, providing additional acceleration beyond component-level classification.
Technology infrastructure in modern office buildouts creates concentrated opportunities. Data cabling, communication systems, and specialty electrical for tenant equipment typically qualify for 5-year depreciation.
Furniture, fixtures, and equipment included in landlord buildout packages qualify for 5-year or 7-year depreciation. When landlords provide furnished tenant suites, these components generate immediate depreciation benefits.
Documentation and Tracking Requirements
Maintaining separate cost records for each tenant buildout enables accurate depreciation and supports eventual abandonment losses when tenants vacate. Commingling buildout costs with building basis prevents proper depreciation tracking.
Change orders and scope modifications during buildout should be documented for accurate cost allocation. What begins as landlord-funded improvement may shift to tenant responsibility through change orders, affecting depreciation ownership.
Photography documenting buildout completion supports cost segregation analysis. Images of finished tenant spaces help engineers identify components and allocate costs accurately.
Tenant departure triggers analysis of remaining buildout basis. When improvements are demolished for re-tenanting, remaining undepreciated basis may be deductible as an abandonment loss. When improvements are retained, depreciation continues on original schedule.
How Goodlane Group Helps Maximize Buildout Depreciation
Goodlane Group helps office property owners develop systematic approaches to buildout depreciation that maximize benefits while maintaining compliance. Proper structuring and documentation from the start optimizes tax results.
We connect you with cost segregation firms experienced in office buildout analysis. Studies focused on tenant improvements often yield high percentages of accelerated depreciation due to the component mix in typical buildouts.
Our preliminary analysis helps prioritize which tenant buildouts warrant detailed study. Large or complex buildouts typically justify individual studies, while smaller improvements may be grouped or handled through simplified approaches.
Beyond individual buildouts, Goodlane Group helps develop portfolio-wide depreciation strategies. Consistent methodology across properties and tenants simplifies compliance while maximizing aggregate tax benefits.