The tenant will use the improvements for the term of the lease. The landlord capitalizes the cost of the improvements and depreciates them. Typically, this type of rent inducement is more beneficial to the tenant from a Federal income tax standpoint . The tenant does not recognize income from the construction of the improvements. The landlord, who pays for the cost of the improvements, must depreciate certain costs over 39 years, but may depreciate carpet, moveable walls, secondary electrical distributions for equipment and vinyl wall coverings over five to seven years.
Tax laws allow the landlord an abandonment loss when a lease terminates.
A landlord may deduct, on the termination of a lease, its unrecovered basis in leasehold improvements made for a tenant, provided the landlord irrevocably disposes of or abandons the improvements. Landlords and tenants should consider the benefits and tax implications of any inducement in structuring their lease. If so, you already ran out of depreciation or will run out soon. The property you purchased in the early to mid 80's was depreciated over 15 to 19 years. Whether you used straightline depreciation, or accelerated depreciation, you are, or soon will be, out of depreciation and the tax shelter it provided you.