I am working on a couple of ground leases that our tenants built improvements on (one bank, one fuel/c-store). In both cases leases have expired and the improvements have reverted back to us. I am currently in lease negotiations with new tenants on both buildings and my question is: now that we are the owners of the improvements can we depreciate the improvements against the income associated with the new leases?
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Can you depreciate something you didn't pay for? Good question, not sure.
I'd consult with a real estate CPA. There are so many variables to this, that nobody on an anonymous forum will be able to provide you a good answer.
Now, with that said, there are a lot of nuances (or there should be) in lease agreements pertaining taxation of leasehold improvements. If the tenant paid for, and owned the improvements during the lease term, then they would have been depreciating those improvements on their taxes. At the end of the lease term, they will likely have taken an abandonment loss of the remaining, non-depreciated value of the improvements, since ownership of said improvements reverted back to the owner (i.e. you/your company).
In the above scenario, since the tenant paid for, and depreciated, the leasehold improvements, you as the owner are not qualified to claim any depreciation.
This is just a general example, and shouldn't be relied upon for tax/accounting advice.
I mean, are you carrying a basis on these improvements? The answer would need to be yes to claim depreciation (otherwise this is division by zero). I don't think you can reallocate purchase price in this situation (like claim a remainder value in improvements?? I think you would have depreciating already if the case), but worth asking a CPA. The only think I'd think you could would be to recover any expenses in leasing, TIs, or further improvements to the bldgs, if tied to a lease your CPA should be able to set it out to amort over the term of the lease (which is probably shorter than 39 years, otherwise go with the 39 years). Of course, if your CPA says those items are just expensible, that is clearly better (i've been shocked at what CPAs will let clients expense vs. amort/depreciate, but im not a CPA..)
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