1. Landlord makes/pays for improvements and is reimbursed by the tenant as a substitute for rent - Rental income and depreciation for the Landlord in both commercial and residential scenarios.
A: correct. The landlord/owner "owns" the improvements and the landlord/owner is the one who depreciates the property improvement/asset. All monies paid to the landlord/owner by the tenant, is rental income. Period.
2. Landlord provides a cash allowance to the tenant to make improvements - Rental Income and depreciation to Tenant if commercial. Just Rental Income to Tenant if residential. Landlord amortizes as a lease acquisition cost in both residential and commercial scenarios.
Incorrect on both counts. A "tenant" doesn't report "income" from a property they are paying rent for, unless they are sub-leasing to a third party and sub-leasing is permitted by the property owner.
Any way you look at this, the landlord/owner paid for the improvements and the landlord/owner owns those improvements. Only the landlord/owner will depreciate those improvements. All you've done here is make the tenant an unnecessary "middle-man" in the money path to pay for the improvements. Nothing is amortized. It's all capitalized and depreciated by the property owner.
On the commercial front, if the tenant is renting the commercial building and does a "build out" that they the tenant pay for with no reimbursement from the owner, then the tenant has what is referred to as "qualified improvement property" and the tenant claims and depreciates it on the tenant's tax return. Whereas if the landlord/owner pays for it, then it's just a standard property improvement that the landlord claims and depreciates.
3. Tenant makes/pays for improvements and agrees to have their rent reduced - The difference in reduction of rent from original amount is Rental Income to the Landlord in both commercial vs residential scenarios. No depreciation for Landlord.
The fact the rent is reduced doesn't play into this. The commercial tenant has qualified improvement property the tenant paid for. The residential tenant has nothing, since they have no ownership in the property they improved. The residential owner has an increase in cost basis with that property improvement/depreciable asset since they own that residential property. It doesn't matter who paid for it either.
4 - Tenant moves out after improvements/lease ends - Unless improvements were tenant-specific (in that case they would be forced to be fully depreciated/written off), any improvements on the Landlords books would be kept to depreciate in both commercial vs residential scenarios.
For both commercial and residential, deprecation is "NEVER" written off. Remember, depreciation is *NOT* a permanent deduction. That depreciation "HAS" to be recaptured at some point in time, and taxes *will* be paid on that recaptured depreciation. (There is one exception involving death, but I'm not going to get off on that tangent for your particular scenario.)
On commercial property, when the lease ends and the tenant moves out, the owner "inherits" all of the tenants property improvements and all prior year's depreciation, and continues to depreciate based on the original "in service" date established by the tenant. This "inheritance" thus increases the owner's cost basis and benefits the departed tenant because it's the property owner, and not the departed tenant that will at some point in time, have to recapture all that depreciation and pay taxes on it.
On residential property this is not an issue to be considered since a tenant can not depreciate property they don't own. On the residential side, just because the tenant paid for it, does not make them the owner of it. As you're aware, this is not always the case on the commercial side, as it depends on the lease and how it's worded.
