Client has a freestanding small commercial buliding valued at $600,000. A new tenant is moving in under a five year lease. The tenant has requested the following: Three small offices reconfigured into a large training/conference room, existing kitchen and another office made into one large breakroom, water foutain and sinks to conform to ADA regulations (not currently required by building code due to small square footage). Basically he is moving walls, lighting and air ducts, reconfiguring light switches & outlets, recarpeting/retiling the area, improving the plumbing to ADA and painting to entire interior. Costs including plans etc about $30,000. The tenant is paying for kitchen upgrades to counters & appliances, telecom & internet wiring and signage. None of wich extends the life of the building (its only 5years old) but it gets it leased. Any thoughts about repairs vs. capital. If capital what lives would you use?

asked 07 Mar '10, 18:21

PStampley's gravatar image

accept rate: 10%

The remodeling you have described increases the value of the property to the lessor (he is able to rent now and couldn't without the improvements) and should be capitalized over the term of the lease if the client anticipates removing the improvements after the lease period.

For the tenant, the expenses would be leasehold improvements depreciated over the life of the lease.


answered 07 Mar '10, 18:55

Lance%20W%20Gurel%20CPA%203's gravatar image

Lance W Gure...
accept rate: 17%

edited 07 Mar '10, 19:20

TaxQueries's gravatar image

TaxQueries ♦♦


The cost of the improvements whether paid for by the lessor or lessee are considered real property and depreciable over 39 years not the life of the lease. At the end of the lease, the remaining net book value may be written off as a Sec 165 loss if they are not "common improvements" that are usuable by another tenant. (The only improvements amortizable over the lease life were pre-1988 improvements.)

(07 Mar '10, 21:00) Brent Berkman

Thank you for the correction. I understand that this is the case for the lessor, but is it also the case for the lessee. The lessee doesn't see any prospect of benefit beyond the term of the lease, do they?

(08 Mar '10, 00:23) Lance W Gure...

I thought the 39 year rules amended in 2004 to 15 years lapsed at end of 2009 and its now back to 39 years if owner does it. But I think tenant can write it off over his lease, if true, change way deal is written?

(08 Mar '10, 02:10) Remedy
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Asked: 07 Mar '10, 18:21

Seen: 1,173 times

Last updated: 07 Mar '10, 19:20