Understanding Tenant Improvement Ownership
Tenant improvement depreciation depends on who owns the improvements for tax purposes, which may differ from legal ownership. When landlords fund improvements through tenant allowances, the improvements typically become landlord property and depreciate on the landlord's tax return regardless of who constructs or manages the buildout.
Tenant-funded improvements to landlord property may create landlord income and depreciable basis depending on lease terms. If tenants install permanent improvements that cannot be removed at lease end, landlords may recognize income equal to the improvement value while gaining depreciation deductions on that same amount.
Lease provisions significantly affect improvement ownership for tax purposes. Provisions addressing improvement ownership, removal rights, and lease-end treatment should be reviewed by tax advisors to determine proper depreciation treatment.
Qualified improvement property rules affect how certain tenant improvements depreciate. Improvements to interior, non-structural portions of nonresidential buildings may qualify for 15-year depreciation and bonus depreciation regardless of who funds them.
Allocating Tenant Allowances
Tenant improvement allowances structured as reimbursements for landlord property typically create landlord basis in the improvements. The landlord claims depreciation on the allowance amount as improvements are placed in service, with cost segregation identifying components qualifying for accelerated treatment.
Cash allowances characterized as rent concessions rather than improvement funding receive different tax treatment. How allowances are documented in leases affects whether landlords recognize improvement basis and corresponding depreciation deductions.
Multi-component tenant buildouts require allocation of allowance amounts to specific improvements. When a $100,000 allowance funds flooring, electrical, plumbing, and millwork, cost segregation identifies how much of that allowance applies to each component and the appropriate depreciation period for each.
Documentation of allowance use supports cost segregation accuracy. Requiring tenants to provide invoices and contractor documentation for allowance reimbursement creates the records needed for proper component identification and classification.
Complex Tenant Improvement Scenarios
Restaurant tenants often fund improvements including specialty kitchen equipment, exhaust systems, and grease traps that become part of the building. Proper analysis distinguishes between removable equipment (tenant property) and permanent installations (landlord property with landlord depreciation).
Anchor tenant buildouts in retail centers frequently involve millions in improvements. Detailed allocation of these substantial investments identifies significant accelerated depreciation opportunities across multiple component categories.
Tenant improvement turnover when spaces are re-tenanted creates abandonment loss opportunities on demolished improvements and fresh depreciation on new buildouts. Tracking improvement basis by tenant enables claiming appropriate deductions when tenancy changes.
Subleasing situations complicate improvement ownership analysis. When original tenants install improvements and then sublease, determining who holds tax ownership of improvements requires examining both the prime lease and sublease terms.
How Goodlane Group Helps with Tenant Improvement Allocation
Goodlane Group helps retail property owners navigate complex tenant improvement ownership questions before cost segregation studies begin. Clarifying ownership ensures study results accurately reflect depreciable basis and appropriate recovery periods.
We work with your lease administration team to gather improvement documentation organized by tenant. Complete records of allowances, reimbursements, and tenant-funded improvements support accurate cost segregation analysis.
Our preliminary analysis identifies major tenant improvements deserving detailed study. For multi-tenant properties with varying improvement levels, prioritizing high-value buildouts focuses engineering effort where it generates the greatest benefit.
Beyond cost segregation, Goodlane Group advises on lease provision structuring for future tenant improvements. How leases address improvement ownership affects tax results, and proper structuring preserves landlord depreciation benefits.