Leasehold Improvements
Leasehold improvements are any alterations, additions, or improvements a tenant makes to leased commercial space — framing, electrical, plumbing, flooring, ceilings, built-in fixtures, and finish work. From a construction standpoint, leasehold improvements are the physical buildout. From an accounting standpoint, they are capitalized assets that the tenant depreciates over the shorter of their useful life or the lease term under GAAP, or over 15 years under the Modified Accelerated Cost Recovery System (MACRS) for tax purposes.
Updated July 18, 2026
Key Facts
- 1Leasehold improvements are depreciable over 15 years under MACRS and may qualify for bonus depreciation or Section 179 expensing in the year placed in service — potentially allowing full deduction in year one
- 2When a lease ends, leasehold improvements typically remain with the property and revert to the landlord — unless the lease requires the tenant to restore the space to its original condition
- 3Tenant improvement allowances received from landlords generally reduce the depreciable basis of leasehold improvements, not income — consult a CPA for the specific accounting treatment
Leasehold Improvements vs. Personal Property
The IRS and accounting standards distinguish between leasehold improvements (permanently attached to the building) and personal property or trade fixtures (attached but removable without damaging the space). Commercial refrigeration units, freestanding equipment, and trade-specific fixtures may qualify as personal property and depreciate faster than leasehold improvements.
This distinction affects both your tax strategy and your end-of-lease obligations. Equipment treated as personal property can typically be removed at lease end; leasehold improvements become the landlord's property. Work with your CPA and attorney to classify buildout costs correctly from the start.
Qualified Improvement Property (QIP)
The Tax Cuts and Jobs Act (2017) created the Qualified Improvement Property (QIP) category — interior improvements to nonresidential buildings placed in service after the building was first placed in service. QIP is eligible for 15-year depreciation and bonus depreciation, making it highly advantageous for commercial tenants who are building out leased space.
Most leasehold improvement work qualifies as QIP. Exceptions include structural components, elevators, escalators, and internal structural framework. Your CPA can identify which components of your buildout qualify and how to maximize the depreciation benefit.
Frequently Asked Questions
Who owns leasehold improvements — the tenant or the landlord?
The lease controls this. In most commercial leases, improvements become the landlord's property at the end of the lease term. Some leases require the tenant to remove specific improvements (a restaurant's Type I hood and grease trap, for example) and restore the space to its original condition. Read the lease's restoration clause carefully before making any improvements.
Does a TIA affect the depreciable basis of leasehold improvements?
Generally yes. TIA received from the landlord typically reduces the tenant's depreciable basis in the leasehold improvements by the amount of the allowance — meaning you can only depreciate what you actually paid out of pocket, not the full buildout cost. The specific tax treatment can vary; consult a CPA.
Can I deduct leasehold improvements immediately or must I depreciate them?
Under current law, QIP leasehold improvements may qualify for 100% bonus depreciation in the year placed in service (subject to the current bonus depreciation percentage in effect and your specific tax situation). This can allow a full deduction rather than 15-year depreciation. This is one of the most impactful tax planning opportunities for business owners doing a commercial buildout.