Whether you’re improving space that you lease or a building you own, and you’re improving the space for a tenant, you may be eligible for special depreciation. While the Internal Revenue Service treats improvements to a building as a part of the building and assigns them the same relatively long life as the building, leasehold improvements are different. Since their life is really tied to your tenancy, as of the date of publication, the IRS gives you the opportunity to write them off more quickly.

Many tenant improvements for commercial tenants have 39 year depreciable life. As of the date of publication in June 2013, leasehold improvements are depreciated over a 15-year period. By default, though, the depreciation life of a leasehold improvement is the same as any other commercial real estate improvement…39 years. Let’s say you spent $200,000 in tenant improvements for two tenants: one signed a five year lease, another one signed a ten year lease. Let’s also say that at the end of its lease, your five year tenant moved out and you need to rebuild that suite for a new tenant. Logically, you should be able to write off those tenant improvements that you are now demolishing, right

You can, but only if you can identify what they are. If you spent that $200,000 on two different suites, and booked it as one asset, you will not be able to specifically identify what got demolished five years later. However, if you were to identify your tenant improvements on suite by suite basis, you would be able to enjoy a quicker tax write off under the scenario discussed previously. To be considered a leasehold improvement, the IRS applies a few tests to the cost of work done on a building. First, it has to be done for the benefit of a tenant and specifically at the tenant’s request. Second, it has to be done exclusively within the demising walls of their space — the walls between tenants and separating tenants from a shared hallway. Third, it cannot be the installation of an elevator or escalator. Finally, the building must be at least three years old for any improvement to be considered a leasehold improvement.

Even though many tenant improvements are 39 year property, there are a number of assets that could still be depreciated over 5, 7, or 15 years. Gateway Construction’s job cost reports will allow you to break them down into these different categories, which, again will result in a quicker, more accurate write off. 


Gateway has been specialized in new construction and capital projects since 2001 -check out our project archive for past projects or our gallery of recent construction projects here.  Contact us at 206.621.9111 or email us here.