Should Leaseholders Pay For Improvements?
Should Leaseholders Pay
Whether or not you should pay for improvements depends on the type of leasehold property and the terms of the lease. A commercial lease typically allows the landlord to build and pay for improvements, while a residential lease does not allow a tenant to make such alterations.
Using a lease to pay for improvements is often the best way for a business owner or renter to customize their space to meet their specific needs. These changes can include painting, installing partitions, and changing flooring or ceilings.
It’s important to understand the tax implications of these types of renovations before you begin work on them. The Internal Revenue Code allows these types of alterations to be depreciated over their useful economic life, which typically lasts five years or less.
Should Leaseholders Pay For Improvements?
In addition to paying the costs of these alterations, a renter may also need to pay sales tax on materials used in the construction. For example, if a building is constructed in Oregon and purchased by a commercial tenant in California, the rental property owner will need to pay the state’s sales tax on the cost of the construction materials.
Landlords frequently offer a tenant improvement allowance (TIA), or a fixed sum of money the landlord is willing to spend on leasehold improvements for you. These amounts can range from a flat amount to a per-foot amount.
A tenant improvement allowance is usually stated in the lease, so you know exactly what you can expect to pay. This can help you plan your budget. If your renovations exceed the TIA, you will need to reimburse the landlord for the extra expenses.
The TIA is also generally subject to federal and state income taxes. However, the IRS doesn’t consider a TIA taxable income if the landlord directly pays you the money for it.
Choosing a commercial leasehold improvement payment type can have a big impact on how much you will have to pay for it, and what kind of contractor you can use. If you choose a tenant improvement allowance or rent discount, you will have more control over the renovation because you can oversee the contractor’s work and avoid potential cost overruns or quality issues.
However, these payments can also be expensive, especially if you don’t have the necessary funds to complete the work on your own. It’s a good idea to consult a tax professional or accountant before choosing your leasehold improvement payment type.
While many leases have provisions for allowing the landlord to build and pay for certain improvements, it’s very important to read these carefully. Depending on the lease, these costs might be excluded from the cost of a new building or the CAM budget (common area maintenance), or they could be charged for and recovered through service charges.
The best way to protect yourself from paying for a capital improvement is to carefully review your lease and negotiate with your landlord on what you can expect to pay. Most of the time, you will have to pay for the construction, unless your lease specifically requires that the landlord contributes to the cost of the improvements.