In the News

March 1, 2005

New Law Allows for Faster Depreciation of Tenant Improvements

The American Jobs Creation Act of 2004, which went into effect on Oct. 22, 2004, allows commercial property owners—including office building and shopping center owners—to depreciate improvements they make to tenants' spaces over 15 years, rather than 39 years, as was previously required. Owners have always argued that they should be allowed to depreciate such improvements over the lease term, rather than the 39-year schedule used for depreciating the building itself.

New Law Allows for Faster Depreciation of Tenant Improvements

The American Jobs Creation Act of 2004, which went into effect on Oct. 22, 2004, allows commercial property owners—including office building and shopping center owners—to depreciate improvements they make to tenants' spaces over 15 years, rather than 39 years, as was previously required. Owners have always argued that they should be allowed to depreciate such improvements over the lease term, rather than the 39-year schedule used for depreciating the building itself. Since the length of most typical commercial leases is closer to 15 years than 39 years, this speeded up depreciation schedule is good news for owners.

How New Law Benefits You

Under this new federal law, you'll be able to deduct more each year of the cost of qualifying improvements you make to a tenant's space than you would have been able to in the past, says Washington, D.C., tax attorney Howard N. Solodky. For example, say you spend $200,000 on qualifying improvements for a tenant's space. If you depreciate $200,000 over 39 years, you would be entitled to a $5,128 deduction per year ($200,000 ÷ 39). But if you depreciate the $200,000 over 15 years, as the new law allows, you would be entitled to a $13,333 deduction per year ($200,000 ÷ 15).

Which Improvements Qualify

The new law doesn't apply to all improvements you make for tenants, notes Solodky; it applies to the following improvements only:

  • Improvements “placed in service”—that is, available for use—after Oct. 22, 2004, and before Jan. 1, 2006. So faster depreciation of qualifying improvements is only temporary;

  • Improvements that you—not the tenant—own during and at the end of the lease term; and

  • Those portions of the improvements that don't affect the building's internal structure, don't benefit a common area, aren't enlargements of the building, and aren't elevators or escalators. So lighting and interior, nonload-bearing walls would qualify, but a new HVAC system serving both the tenant's space and a common area of the building wouldn't, says Solodky.

Also, the building in which the tenant's space is located must have been in use for more than three years before the improvements were made. And the new law applies to improvements made to a restaurant tenant's space only if more than 50 percent of the building in which the space is located is devoted to the preparation, seating, and onsite consumption of prepared food. So if the tenant is the only restaurant tenant in your building, improvements to its space wouldn't qualify.

CLLI Source

Howard N. Solodky, Esq.: Partner, Womble Carlyle Sandridge & Rice, PLLC, 1401 Eye St. NW, 7th Fl., Washington, DC 20005; (202) 857-4424; hsolodky@wcsr.com.

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