Extension of 15-Year Leasehold Improvement Depreciation OKed by Senate Committee

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If commercial real estate owners have their way, the tax extenders bill approved by the Senate Finance Committee before the August recess will be passed by the full US House and Senate this fall.

One of the items in the bill is the reinstatement and extension of the 15-year leasehold improvement provision which would be retroactive to the beginning of 2012 and apply to all of 2013. If this provision is not extended, it would--along with a number of other tax provisions--expire on December 31, 2012.

"This is a very welcome development as this legislation allows leasehold improvement construction costs to be more accurately aligned with the income generated by tenant leases," says Real Estate Roundtable president and CEO Jeffrey DeBoer.    

A 2010 policy paper put out by the Real Estate Roundtable explains the rationale in more detail, noting that: "Studies by Treasury, Congress and the real estate industry have concluded that the current tax depreciation lives for non-residential structures (39 years) and residential structures (27.5 years) exceed the useful lives of such properties (due to physical wear and tear plus technological obsolescence). Policy makers should reduce the depreciation period for both assets to a period that more closely reflects the economic lives of such structures..."

The tax provision passed last week by the Senate Finance Committee seems to follow the advice of the paper. It would allow property owners to recover the cost of building out a tenant space over 15 years instead of 39, freeing up capital that can be reinvested, possibly in job creation.

The 15-year leasehold improvement depreciation provision was part of a $205 billion bipartisan package of tax extenders that also includes a two-year "patch" to prevent middle-income taxpayers from having to pay the alternative minimum tax, an extension of the research and development tax credit and an extension of the deduction for state sales tax through 2013. The package originally included a provision allowing  same-year expensing of brownfields cleanup costs, but that provision was taken out of the bill during the Senate Finance Committee's deliberations.

"Depreciation is a non-cash expense, so the depreciable component reduces taxable income," says Tom Dixon, president of Miami-based Dixon Commercial Real Estate, Inc. "It is one of the ways that the government can stimulate economic activity," he says. In fact, it may encourage people to buy new equipment, because they will have more money to spend, says Dixon.