When the facility you manage needs improvements, the work fits into one of two broad categories: building improvements or leasehold improvements. It is important to know the differences and how they affect taxes. A building improvement is work done for the facility. A leasehold improvement is work completed for the facility that is for a specific tenant’s benefit.
When making a leasehold improvement, the work must be located within the demising walls of the tenant’s space and made because of requirements in the tenant’s lease. The facility must be at least three years old before any improvement project can be classified as a leasehold improvement.
Any project completed in your building that changes its function, increases its value or extends its useful life is an improvement. Examples include renovation of a lobby or common bathroom, replacing light fixtures for energy efficiency, replacing the roof, or any changes made outside of a tenant’s space such as repairing elevators and floors.
The IRS requires you to depreciate a facility improvement over the same time frame that you depreciate your building. Commercial real estate buildings typically have a 39-year life, so it can take a while to regain the expenses of improvement work. If an improvement can be classified as a repair or as a leasehold improvement, you will earn more tax savings in the near term.
The rules concerning leasehold improvement depreciation are complex and constantly changing. Be sure to talk to your accountant to find the current state of the law and how it will affect your property.
If you have any questions regarding facility improvements or would like an estimate of an improvement project, contact MAC today. MAC is a contractor Kansas City property and facility managers have trusted for more than 25 years. We provide facility repairs, custom cabinetry services, tenant finish services and more!