ADVOCACY ISSUES
Leasehold Depreciation Tax
BOMA Position:
Limiting leasehold improvements to be depreciated at
a rate of 1/39th per year until the improvement goes “out of
service” runs counter both to common sense and the reality of
the marketplace. It is a hidden and inequitable tax on the commercial
real estate industry. Federal and state tax codes should be amended
to more closely reflect the reality of the marketplace.
Background Information:
Leasehold improvements include changes to walls, floors,
ceilings, lighting, and plumbing, to meet the needs of a new or existing
tenant. In the commercial real estate marketplace, with the average
lease running from five to ten years, such reconfigurations are commonplace.
However, improvements made to a tenant’s space must be depreciated
at the same rate as the building structure itself, which results in
a depreciation time period of 39 years under current regulations. Although
taxpayers can now write off an improvement after it goes “out
of service,” as occurs when the tenant vacates the rented space,
the tax code continues to unfairly treat improvements still “in
service,” as taxpayers may only deduct 1/39th of the improvements’ value
per tax year.
Before addressing the issue of depreciation in new legislation, the
House Ways and Means Committee requested that the U.S. Treasury Department
review the current state of tax law on assets’ useful lives and
depreciation periods. To assist the Treasury in drafting the report,
BOMA International and its fellow real estate associations commissioned
a useful life analysis of real estate by Deloitte & Touche. (Available
online)
This analysis found that buildings have a useful life of only 20
years on average, that tenant improvements clearly have much shorter
useful
lives, and that real estate is being unduly penalized by unjustifiable
depreciation timeframes. The analysis and our comments were submitted
to the Treasury in an attempt to highlight the concerns of real
estate.
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