Leases, TI, Tenant Improvement Strategies
Who Pays, Who Gets the Deduction?
The Landlord or the Tenant?
1. IF Landlord Pays. The Landlord gets the tax deduction benefits and depreciates the Tenant Improvements (TI) over the useful life of the TI; the tenant taxation is neutral.
2. IF Tenant Pays: If tenant pays for TI, the tenant is the owner of the TI and depreciates the TI over the depreciable life. Landlord's taxation is neutral. Excess basis at the end of lease term is written off by tenant.
3. IF Allowance Granted to Tenant: The landlord amortizes over the life of the lease. Tenant is owner of the allowance TI and has taxable income on the allowance. Tenant depreciates the costs over depreciable life and writes off excess basis at lease end term.
4. IF Tenant Pays & Assigns Ownership to Landlord: If the tenant pays for the TI and transfers ownership to landlord at completion of TI, the costs of the TI are taxable income to the Landlord at transfer, and Landlord depreciates the TI of depreciable life. The tenant amortizes TI costs over the life Term of the Lease.
5. IF Landlord Grants Rent Concession and Tenant Pays: If the tenant pays for the TI and the Landlord grants a concession on rent, the Tenant is the owner of the TI and depreciates the TI over depreciable life with excess basis write-off at Term expiration. If the Lease identifies the concession is for rent for consideration of the TI, then the Landlord has taxable income and a depreciable TI asset.
6. IF Landlord Loans Tenant Money: If the landlord loans the money to tenant to pay for the TI, the Tenant is the owner and depreciates TI over depreciable life, and writes-off excess basis at Lease Term expiration. Landlord has taxable income for Interest paid or imputed and Tenant has the reciprocal write-off.
IRS CIRCULAR 230 DISCLOSURE NOTICE: To ensure compliance with IRS requirements, we inform you that any U.S. federal tax advice contained in this communication is not intended or written to be used, and cannot be used by any taxpayer, for the purposes of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.