One of the most underutilized tax benefits available to commercial landlords is the ability to write off abandoned or demolished tenant improvements when they’re no longer in use. It’s not a straightforward process, and figuring out which features can fall under this provision is relatively tricky. Likewise, there are certain tax benefits to renovating old tenant space in order to attract new tenants.
Let’s look at an example. Say the previous tenant in your commercial office building was a very small consulting firm. Because they didn’t have very many employees, the office space was arranged in such a way that each employee received a huge office and there was very little open, shared space. Those tenants have since left your building, and in order to attract a new tenant, you demolished the existing office layout and created a more standard office space with a couple of large offices, several smaller offices, a couple of conference rooms, and an open space for cubicles and workspaces. All of the improvements done specifically for your previous tenant can be written off, as they’ll no longer provide any future benefit. And there are benefits to be derived from the improvements you made to lease your space out again.
Now, in this example, you won’t be able to write off the heating systems, as they’re still in use. You won’t be able to include the front door or the exterior windows—they’re still in use. You will, however, be able to include the interior walls that separated the large offices, the fixtures that were installed specifically for the last tenant—any improvements that are being demolished or will not provide any future value can be included. And, thanks to the IRS' new guidelines issued at the end of 2011, you can include structural components as well.
If you think that an abandonment/improvement study might yield some tax benefits for you or your real estate clients, enlisting a specialist like MS Consultants can take all of the headaches and worry out of the process. We combine expertise in tax matters with engineering and construction knowledge. Our studies are rigorous, and our reports are thorough—we produce the sort of quality reports that perform outstandingly during audits.
If you’d like to learn a little more about what tenant space abandonment & improvement study might be able to do for you, contact one of our consultants today.