Leasehold Improvement

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What is a 'Leasehold Improvement'

A leasehold improvement consists of alterations made to rental premises in order to customize it for the specific needs of a tenant. Leasehold improvements include painting, installing partitions, changing the flooring, putting in customized light fixtures and so on. Leasehold improvements can either be undertaken by landlords, who may offer to do so to increase the marketability of their rental units, or by the tenants themselves.

Also known as tenant improvements.

BREAKING DOWN 'Leasehold Improvement'

Temporary leasehold improvements undertaken by tenants can be removed at the end of the lease period, as long as it is stipulated in the lease agreement, and removal would not inflict any damage on the rental premises or building structure.

A leasehold improvement is classified as an asset that can be depreciated by the landlord over time. While the useful economic life of most leasehold improvements is 5 to 10 years, until 2004, the Internal Revenue Code required that depreciation for such improvements occur over the economic life of the building, or 39 years. Tax legislation enacted in 2004 reduced this depreciation period to 15 years; however, the 15-year depreciation schedule is temporary in nature and must be reauthorized annually.

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