J.K. Lasser's Small Business Taxes 2013: Your Complete Guide to a Better Bottom Line

Improvements You Make to Leased Property

If you add a building or make other permanent improvements to leased property, you can depreciate the cost of the improvements using Modified Accelerated Cost Recovery System (MACRS) depreciation. (For a further discussion of depreciation, see Chapter 14.) Generally, the improvements are depreciated over their recovery period, a time fixed by law. They are not depreciated over the remaining term of the lease.

Example

You construct a building on land you lease. The recovery period of the building is 39 years. When the building construction is completed, there are 35 years remaining on the lease. You depreciate the building over its recovery period of 39 years, not over the 35 years remaining on the lease.

If you acquire a lease through an assignment and the lessee has made improvements to the property, the amount you pay for the assignment is a capital investment. Where the rental value of the leased land has increased since the beginning of the lease, part of the capital investment is for the increase in that value; the balance is for your investment in the permanent improvements. You amortize the part of the increased rental value of the leased land; you depreciate the part of the investment related to the improvements.

Special Rules for Qualified Leasehold, Restaurant, and Retail Improvements

Improvements to leaseholds (by the landlord or tenant pursuant to the terms of the lease), restaurants, and retail establishments can be ...