Retail Improvement Property Depreciation

For building improvements that are “qualified retail improvement property” and were placed in service before January 1, 2012, depreciation deductions are allowed over a 15-year period. This treatment provides considerable relief from the general rule that depreciation deductions for non-residential buildings, or improvements to the buildings, are allowed over a 39-year period.

Further note that you may be able to elect to “expense” (i.e., deduct in the placed-in-service year) up to $250,000 of the cost of qualified retail improvement property placed in service in tax years that began in 2010 or 2011. Eligibility for the expensing election depends on the size and nature of your other investments in business property.

Qualifying improvements must be made to an interior portion of a nonresidential building, and the building portion must be open to the general public and used in the retail trade or business of selling tangible personal property to the general public.

An improvement is not qualified retail improvement property if (1) it enlarges the building, (2) is an elevator or escalator, (3) is a structural component benefitting a common area or (4) is made to the internal structural framework of the building.

Additionally, qualifying improvements must be placed in service more than three years from the date the building was first placed in service. However, you don't have to be the taxpayer who first placed the building in service. Thus, you are eligible to place qualifying improvements into service even if you haven't owned or leased the building for the entire three years that the building has been in service.

By the way, in connection with any retail project, I can help you identify items of property that, although attached to the building, are, for depreciation purposes, considered to be machinery or equipment and, thus, qualify for depreciation periods considerably shorter than 15 years.