Lessor paid improvements

[Louis5560]

I own the Property.

I am single Member LLC

LLC is leasing from Owner (me)

LLC needed building to up to code to produce product and could not proceed without them. I have a license from the AG Department now

The Shop is a separate building from the residence and was not finished except for a little sheetrock on interior outside walls.

Costs were large to get that little certificate from the State approving the space. I have a license from the AG Department now

Plumbing, Electrical, HVAC, Septic (separate for this building from the house), Construction of room walls, doors, windows, flooring, sheetrock and Paint.

Yes, I know about Arm's Length transaction when leasing property you own to your LLC and fair market price.

I need to find the best way to handle the "BUILDOUT" on either the LLC taxes or as the rental on my personal taxes. Someone suggested since this is my first space and AG Certificate Approval, I could amortize as Start_up Costs. The LLC was formed in October of 2021 with minor sales that year. Making product in Home Kitchen.

Any guidance is appreciated:)

[RobertB4444]

You can depreciate them on your personal return as an improvement to the rental property over 27.5 years or you can depreciate them on the LLC side as 'leasehold improvements' for the life of the lease.  Either one is proper.

@Louis5560 

[Louis5560]

Depreciate the leasehold improvements or amortize(capital expenses as business expense on the LLC side? I was told I could not depreciate unless I owned the property which was improved.

[DianeW777 · Accepted solution]

Not true.  Capital improvements paid by the tenant of a rental unit can be depreciated as 'leasehold improvement' or 'qualified improvement property'. 

• It's common for a lessor or lessee of a building to construct leasehold improvements to make the rented space area work for the business needs. These leasehold improvements are depreciated separately from the building. When a lessor pays for construction of the improvements, the lessor claims the depreciation.
• IRS Publication 946