cabinets in a rented space

[oceanlovin'ea]

Client has an art studio that she started to rent this year. She installed new cabinets when she moved in. Would those be considered leasehold improvements? Or can I just section l79 them?

Linda , EA

[ATSMAN]

If those cabinets are such that they have become part of that property by being permanently fixed (will stay there if she moved) then I would consider them leasehold improvements.

Having said that I am not sure what is special about this art studio, but my other retail clients who lease space have racks and cabinets that are not permanently affixed to the store and are not considered leasehold improvements.

[Burke]

The term "leasehold improvements" means improvements made and incorporated into a lease that the tenant signs, and which improvements are usually made by the owner of the property as a condition of the lease. I don't think cabinets installed by the renter would qualify per se unless this was done, but the tenant should be able to write them off using normal depreciation rules, and perhaps Sect 179. See Pub 946, page 27, and IRB issued in April 2012. If made by the owner and incorporated into a lease, they are depreciated over the term of the lease.

[ATSMAN]

Actually Leasehold improvements are generally made by the tenant and revert to the ownership of the landlord upon termination of the lease, unless the tenant can remove them without damaging the leased property.

There is a special category of qualified leasehold improvements, then there are special rules for restaurants but I suppose we are not discussing those.

[Burke]

For a small rental space, perhaps the tenants usually make improvements. I was thinking of larger office buildings which incorporate multiple tenants. The owner usually does the TI for the incoming tenant, i.e, restructuring the space to change its size, number of offices within the space, soundproofing, carpet, paint, sinks, plumbing, any other required items, etc. etc. Permanent improvements made by the tenant do revert to the owner upon termination of the lease, but I would call them improvements, not leasehold improvements which have special treatment in the depreciation.

[oceanlovin'ea]

Thanks for your thoughts. Guess I wasn't really sure about the real meaning of leasehold improvements.

I agree this wouldn't be that.

Linda, EA

[Kram BergGold]

39 or 7 YR Property

You stil need to decide whether to depreciate over 39 or 7 years. If she bought the cabnets and then attached to the wall I would depreciate over 5 years or claim 179. If someone came into her studio and made them on site then I would say 39 years and no 179 allowed.