TIP OF THE MONTH - September 2007

LET THE LANDLORD PAY FOR THE FIT-UP

There are many inequities in the tax law, and one of these pertains to the write-off of leasehold improvements a tenant makes to a landlord’s property. Under the tax law, the owner is required to depreciate residential property over a 27.5 year life and commercial property over a 39 year life. Usually a tenant’s lease is 10 years or less, a considerably shorter period than the property’s depreciable life. Nevertheless, if a tenant makes leasehold improvements, for tax purposes the cost is required to be written off over the same period as the property life, starting with the year in which the improvements are first placed in service, regardless of the fact that the term of the lease is much shorter. Thus, even though a commercial property has already been depreciated 15 years by the landlord, the tenant improvements are required to be written off over 39 years. Of course, if the tenant’s lease expires and is not renewed, and the tenant leaves the leasehold improvements, a loss deduction can be taken for the undepreciated portion of the cost of the improvements.

These and other tax issues come up regularly with clients with regard to real estate matters. Besides clarifying the tax rules, we can often recommend tax reducing strategies that enhance cashflow.