The customized alterations a building owner makes to rental space as part of a lease agreement, in order to configure the space for the needs of that particular tenant.
For example, building office spaces and conference rooms to suite the tenant’s needs. From the landlord’s perspective, to the extent the tenant improvements are deemed to be long-term improvements to the property, the costs are capitalized and added to the landlord’s tax basis in the property. These improvements could then be depreciated as with any other real property, subject to applicable depreciation periods (e.x. 27.5 years for residential and 39 years for commercial properties. Depending on the nature of the improvements a shorter amortization period is possible). However, to the extent that the tenant improvements are deemed to be personal property of the tenant, such a amounts would be capitalized by the tenant and depreciated over the applicable schedule based on the nature of the improvement.