What are tenant improvements?
Tenant improvements (TIs) are alterations made to leased commercial space — new walls, flooring, lighting, HVAC modifications, or buildout for a specific tenant's use. When the landlord pays for these improvements (sometimes called a tenant improvement allowance paid to the tenant, or direct landlord construction), they become the landlord's depreciable asset.
The amount a landlord spends on TIs is capitalized into the landlord's basis in the property. The depreciation schedule depends on what type of property the improvements are classified as.
Qualified Improvement Property: the 15-year shortcut
The CARES Act (2020) permanently fixed a prior drafting error in the Tax Cuts and Jobs Act, establishing that Qualified Improvement Property (QIP) — interior improvements to commercial buildings already placed in service — is a 15-year asset eligible for 100% bonus depreciation (at current rates). This is a significant benefit: instead of depreciating tenant improvements over 39 years, a landlord can potentially deduct the full cost in year one.
To qualify as QIP, the improvement must be: (1) to the interior of a nonresidential (commercial) building, (2) to a building already placed in service, (3) not attributable to enlarging the building, installing an elevator or escalator, or making structural changes to the internal framework. Leasehold improvements in a residential rental don't qualify as QIP — they follow the standard 27.5-year residential depreciation schedule.
What doesn't qualify and how to handle it
Structural improvements that enlarge a commercial building, new construction, or improvements to residential buildings do not qualify as QIP. These generally follow 39-year (commercial) or 27.5-year (residential) straight-line depreciation.
A cost segregation study on tenant improvements can reclassify components into personal property (5- or 7-year) if they are not structural — lighting, plumbing fixtures, specialty flooring — which can qualify for bonus depreciation separately. For large TI buildouts, a cost segregation study may identify components that get even faster depreciation than the 15-year QIP category. Track tenant improvements separately in your depreciation schedule, with placed-in-service dates and amounts, so they can be properly depreciated or disposed of at lease end.
Frequently asked questions
Can I take bonus depreciation on tenant improvements I pay for?
Yes, if the improvements qualify as QIP (interior improvements to a commercial building already in service). Bonus depreciation is currently 40% for 2025, phasing down further.
What happens to unamortized tenant improvement costs when the tenant leaves?
If you can demonstrate that the improvements are abandoned or worthless, you may be able to take a partial disposition loss for the remaining basis under the tangible property regulations.
Do tenant improvement allowances paid to tenants get depreciated?
Yes. A TI allowance paid to the tenant, which the tenant uses to build out the space, is the landlord's depreciable asset — assuming the improvements revert to the landlord at lease end.
Sources
- IRS Publication 946 — How to Depreciate Property
- IRS — Cost Segregation Audit Techniques Guide
- IRS Publication 527 — Residential Rental Property
Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.