Can landlords claim any specific tax credits or accelerated depreciation for tenant improvement costs in a commercial strip mall when the improvements do not result in a change of use or substantial upgrade?
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Landlords who pay for tenant improvements in a commercial strip mall—where the improvements do not result in a change of use or a substantial upgrade—are generally not eligible for special tax credits, but they may be able to claim accelerated depreciation under certain circumstances. The key tax considerations are as follows:
1. Depreciation of Tenant Improvements
Ownership and Depreciation Rights
- The party that bears the cost of tenant improvements and retains a depreciable interest (i.e., the landlord, if not fully reimbursed by the tenant) is entitled to depreciate those costs.
- If the landlord pays for the improvements and is not reimbursed by the tenant, the landlord generally owns the improvements for tax purposes and can depreciate them.
Classification of Improvements
- Most tenant improvements in a commercial strip mall are considered “qualified improvement property” (QIP) if they are made to the interior of nonresidential real property, placed in service after the building was first placed in service, and are not attributable to the enlargement of the building, elevators/escalators, or the internal structural framework.
- QIP is depreciated over 15 years under the General Depreciation System (GDS) using the straight-line method.
Accelerated Depreciation (Bonus Depreciation)
- Under current law, QIP is eligible for bonus depreciation if it meets the requirements of IRC §168(k). For property acquired and placed in service after January 19, 2025, bonus depreciation is restored to 100% for qualified property, including QIP.
- For property acquired before January 20, 2025, the phase-down schedule applies (40% in 2025, 20% in 2026, 0% in 2027 and after).
- Bonus depreciation is available for QIP as long as the property is not required to be depreciated under the Alternative Depreciation System (ADS), such as in the case of tax-exempt use property or property used predominantly outside the U.S..
Section 179 Expensing
- Landlords may also elect to expense the cost of QIP under IRC §179, subject to annual limits ($1,250,000 for 2025, phased out dollar-for-dollar above $3,130,000 in total qualifying property placed in service).
- Section 179 expensing is available for QIP and certain other improvements to nonresidential real property, but not for the building itself or for improvements attributable to the enlargement of the building, elevators/escalators, or the internal structural framework.
Alternative Depreciation System (ADS)
- If the property is subject to ADS (e.g., leased to a tax-exempt entity under a disqualified lease, or if the landlord elects ADS), QIP is depreciated over 20 years using the straight-line method and is not eligible for bonus depreciation.
2. Tax Credits
- There are no general federal tax credits specifically for tenant improvements in commercial strip malls unless the improvements qualify under a special program (e.g., energy efficiency credits, which require meeting specific criteria and are generally not available for ordinary tenant improvements that do not result in a substantial upgrade or change of use).
- The low-income housing tax credit (LIHTC) and other credits do not apply to standard commercial strip mall tenant improvements.
3. Other Considerations
- If the landlord receives a tenant improvement allowance from the tenant, the landlord can only depreciate the portion of the improvement cost that exceeds the allowance (i.e., the landlord’s unreimbursed cost).
- If the improvements are made for a tax-exempt tenant, certain assets (other than nonresidential real property) may be considered tax-exempt use property and must be depreciated under ADS.
4. Summary Table of Depreciation Options for Landlords (2025)
- QIP (interior, non-structural, non-enlargement):
- GDS: 15 years, straight-line, eligible for 100% bonus depreciation (if placed in service after Jan. 19, 2025)
- Section 179: Up to $1,250,000 (subject to business income and phase-out limits)
- ADS: 20 years, straight-line, not eligible for bonus depreciation
- Other improvements (not QIP):
- Depreciation period depends on asset class (see MACRS tables)
- Bonus depreciation and Section 179 eligibility depend on asset type and use
5. Conclusion
Landlords can generally claim accelerated depreciation (bonus depreciation and/or Section 179 expensing) for tenant improvement costs in a commercial strip mall, provided the improvements qualify as QIP and are not required to be depreciated under ADS. There are no specific tax credits for such improvements unless they meet the requirements of a special incentive program. The improvements must not be attributable to the enlargement of the building, elevators/escalators, or the internal structural framework, and the landlord must have a depreciable interest in the improvements.
If you have a specific scenario (e.g., improvements for a tax-exempt tenant, or if the improvements are not QIP), additional rules may apply. Please provide more details if you need guidance on a particular situation.
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