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Watch for Tax Traps on TIAs
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Watch for Tax Traps on TIAsNew IRS regulations have created a potentially expensive trap for landlords who give Tenant Improvement Allowances (TIAs) to a retail tenant on a lease that runs 15 years or less. Based on section 110 of the Internal Revenue Code enacted by Congress a few years ago, the new rules would make the landlord the owner of tenant improvements under certain conditions, according to Commercial Lease Law Insider (212-473-8200), an industry newsletter. The key for landlords is to make sure that the lease and all its renewal options add up to more than 15 years or, if that’s not possible, be certain the lease doesn’t contain language that says the TIAs are for the purpose of "constructing or improving qualified long-term real property for use in the tenant’s trade or business at the retail space," the newsletter said, citing Howard N. Solodky, a Washington, D.C., tax attorney. Savvy tenants and their lawyers can be expected to fight to put that language into a lease, because without it the tenant is forced to declare a TIA as income and must depreciate the cost of the improvement over 39 years -- and only the "real property" portion of the improvement qualifies -- while the landlord can write off the expenditure over the term of the lease. If the tenant succeeds in making the landlord own the TIA, then it’s the landlord who’s stuck with the 39-year depreciation schedule, while the tenant gets the improvements tax free. For more information, contact Commercial Lease Law Insider from Brownstone Publishers Inc., 149 Fifth Avenue, 16th Floor, New York, NY 10010. |