The relationship between commercial landlord and tenant is often fraught with complications which often arise from a failure to understand the legal consequences of some formal or informal arrangement within the landlord-tenant relationship. To understand, avoid, and, at the very least, minimize these consequences, commercial tenants and landlords should avail themselves of the experience and knowledge of a qualified tax professional.
A common arrangement between landlords and tenants is a lease inducement payment, made by or on behalf of the landlord to entice a tenant to sign a lease agreement. Lease inducement payments may be:
- cash;
- moving expenses;
- a transfer of ownership in real property such as a building or land;
- payment of expenses by the lessor on the lessee’s behalf;
- a lessor’s assumption of the lessee’s prior lease obligation with a different landlord; and
- payment of termination fees to the lessee’s previous landlord.
Lease inducement payments cause a tenant to recognize income in the year in which the payment is received or earned. If a tenant uses the lease inducement payment to improve real property, the tenant may then capitalize and depreciate them under I.R.C. § 168. Consideration paid by a landlord to induce a tenant to enter into a lease is considered a cost of obtaining a lease, and therefore must be amortized by the landlord over the term of the lease under I.R.C. § 178.
If a lessor makes improvements and owns the property pursuant to the lease, the lessor treats the improvements as a trade or business asset and depreciates them. At the end of the lease, the landlord may be able to treat the improvements as abandoned property and use them as a “write off” under I.R.C. § 168(i)(8)(B). In order for an improvement to qualify as an abandonment loss under I.R.C. § 168, it must have been paid for by the lessor and related to leased property which is disposed of or abandoned subsequent to termination of the lease.
Property is not necessarily abandoned when it is vacated by the tenant. If an improvement is unique to a tenant and unable to be used by another tenant, this may constitute an abandonment. An abandonment may also exist if the improvement will no longer be functional or legal when used by a future tenant.
The tax professionals at the Thorgood Law Firm can help ensure that all landlords and tenants take advantage of all of the tax deductions, exclusions, and credits that may apply to them. If you are a commercial landlord or tenant living in the New York or Tri-State area and have any questions about available tax breaks to reduce your tax bill, call THE TAX EXPERTS at the Thorgood Law Firm www.thorgoodlaw.com. For a FREE consultation, call 212-490-0704.
