Leasehold Improvement Considerations
When a tenant or landlord pays for interior improvements, who made the improvement affects whether it is qualified improvement property and who depreciates it. Lease terms and tenant-improvement allowances need case-by-case review by the taxpayer’s CPA. Educational information, not tax advice.
Educational information, not tax advice.
Updated 2026-10-14
Key takeaways
- QIP requires that the improvement be made by the taxpayer claiming it.
- Generally, the party that pays for and owns an improvement for tax purposes depreciates it.
- A tenant’s own interior improvements to nonresidential space can be QIP for the tenant.
- Lease terms and tenant-improvement allowances need case-by-case review.
- Leasehold-specific IRS guidance beyond the QIP definition and Publication 946 has not been reviewed for this page.
Interior build-outs in leased space can be paid for by the tenant, the landlord, or both through a tenant improvement allowance. The CARES Act added the requirement that qualified improvement property be “made by the taxpayer,” and Publication 946 describes QIP as improvements made by you. A tenant’s own interior improvements to nonresidential space can therefore qualify for the tenant, and a landlord’s improvements can qualify for the landlord.
Who is treated as the owner of the improvement for tax purposes depends on the lease and the facts. That question decides who depreciates the cost and whether it is QIP for that party. A cash allowance that the tenant spends on the tenant’s own improvements is a different fact pattern from a landlord-owned build-out that the tenant merely occupies.
Section 168(i)(8) and Treas. Reg. §1.168(i)-8 also address dispositions of leasehold improvements. A lessor who made an improvement for a lessee, or a lessee who made an improvement, and who has depreciable basis in it, applies the MACRS disposition rules when that improvement (or a portion of it) is disposed of before or upon termination of the lease.
A build-out often includes items that are personal property under Treas. Reg. §1.48-1 — dedicated equipment wiring, removable flooring, decorative millwork — as well as items that are part of the building. A study can separate these. The remaining interior real-property work may be QIP if it meets §168(e)(6), including the exclusions for enlargement, elevators or escalators, and internal structural framework.
This page is educational information, not tax advice. Tenant-allowance treatment, lease-term issues, and ownership are CPA or tax-attorney questions. Leasehold-specific IRS guidance beyond the QIP definition, Publication 946, and the disposition regulation has not been reviewed for this page.
Classification of the work
Start with who has depreciable basis. A party without basis does not depreciate the improvement and cannot claim it as QIP. Cost segregation does not move another person’s basis onto the taxpayer’s schedule.
Next, separate personal property from real-property improvements. Personal property uses its MACRS class and generally half-year or mid-quarter. QIP, if it applies, is 15-year straight line and generally half-year or mid-quarter, not mid-month.
Work that enlarges the building, installs an elevator or escalator, or is internal structural framework is not QIP. It stays with the building class for the party who owns it, unless another provision applies.
Dispositions at lease end
Treas. Reg. §1.168(i)-8(c)(3) applies the MACRS disposition rules to a lessor or lessee who made an improvement, has depreciable basis in it, and disposes of it (or a portion of it) before or upon termination of the lease. Section 168(i)(8)(B) is the statutory cross-reference for lessors.
A partial disposition election can apply to a portion of such an improvement. Timing of that election is generally the original return for the disposition year, with a limited exam-related path. See the partial-disposition page.
Abandonment of tenant-owned improvements when the tenant leaves is a facts question. The regulation requires an intent to discard the asset irrevocably for an abandonment loss. This page does not decide any lease-end result.
Historical rule
Before 2018, the separate category of qualified leasehold improvement property applied, with its own 15-year rules and a 39-year ADS period under prior law. Older guides that focus on that category describe the prior law.
QIP is the current interior-improvement category for nonresidential buildings. Do not apply the old qualified-leasehold tests as if they were still the definition.
Restaurant and retail improvement categories likewise applied only to property placed in service before 2018. Current interiors are tested as personal property, QIP, or building.
What we have not verified
Detailed treatment of tenant-improvement allowances, construction allowances under §110, and whether a landlord or tenant is the tax owner in mixed-funding jobs was not extracted from an official source for this page.
Those omissions are logged rather than filled from secondary articles. The taxpayer’s CPA should review the lease, the funding, and the invoices together.
Related-party leases raise extra questions under the used-property bonus rules and, for manufacturing space, under Notice 2026-16. Related-party lease exceptions in that notice have not been extracted here.
As of October 16, 2026, bonus depreciation at 100 percent for qualified property acquired after January 19, 2025 can apply to a tenant’s or landlord’s qualified personal property and to QIP, if the other tests are met. The acquisition-date and related-party rules still apply to used property in a purchased leasehold position.
Sources
- 1
- 2IRS Publication 946 — How To Depreciate Property (2025)(opens in a new tab)
Appendix B reproduces the Rev. Proc. 87-56 class lives.
- 3
- 4