Leasehold improvements

"Dick Adams" wrote

I can't see how it adds to basis when no money was paid out and there wasn't an "inheritance" since he owned the property already.

Here is the question I would ask a client in such a case: Was the cost of the added garage included in income as rental income back then? If so, then that increase in basis 10 years ago would have started to be depreciated for 27.5 years.

If not;;;?? it should have been.

Thus at the end of the seven years, basis of the house is cost less depreciation on both the house and the garage.

ChEAr$, Harlan Lunsford, EA n LA

As I recall there was a provision in the tax code (is it still there?) that says leasehold improvements made by a tenant but benefit the landlord at the end of the lease, are not taxed to the landlord.

If there's no tax on the improvement, seems to me there'd be no increase in basis for it, either.

Why? It wasn't required in the lease.

Seth

I really want to be Stuart on this one - the only increase you should get in basis would be due to any income you reported as a result of the improvement.

However, I'm not sure about this. Please not that I said NOT SURE, because I'm not. I'd want to research it get an answer you could rely on, but I am concerned about:

1 - windfall benefit. If you buy a desk for $100 and find an original Monet in one of the drawers isn't there some windfall tax that you'd be responsible for? Would this impact basis? 2 - what about those home improvement shows, where they fix up or completely rebuild a home. I believe that the value of these improvements is considered income to the home owners, in which case if they paid tax on it, it should add to basis. 3 - is there any argument that the house WOULD have rented for more had it had a garage and it was rented for less under the condition that the garage be built and transferred to the owner upon termination of the lease? I think this is similar to Harland's position, which I think may have merit.

Let us know what you find out (or decide to do), Gene E. Utterback, EA, RFC, ABA

IRC §109 says, in full,

"Gross income does not include income (other than rent) derived by a lessor of real property on the termination of a lease, representing the value of such property attributable to buildings erected or other improvements made by the lessee."

As far as basis, that's dealt with in regulation §1.1019-1. It says that if a lessor would have had taxable income but for §109, there is no change in basis to the property.

That will be $150.

If it's not cash, are you taxed when you find it, or when you sell it?

I'd imagine that it could be structured to be fully tax free. If the show leases the property from the owner for 14 days or less, any lease payments are tax free to the homeowner. §208A.

Then based on §109, the improvements would also be tax free. They do not increase the basis, however, so the taxpayer would end up being taxed on the improvements when the property is sold.

Apparently not.

Required or not it was done and the cost of the garage paid for by tenant according to IRS is income to the landlord, who may then begin to depreciate it.

ChEAr$, Harlan Lunsford, EA n LA

Why dies §109 not apply to this situation?

That settles it as far as I am concerned.

Even I know this one. It's Treasure Trove covered in Pub 525: "If you find and keep property that does not belong to you that has been lost or abandoned (treasure-trove), it is taxable to you at its fair market value in the first year it is your undisputed possession."

Dick

Thanks. I don't run across this kind of thing often, so probably won't remember it next time either.

Unless the found trove is a record setting baseball, and the IRS commissioner suddenly finds himself in the middle of a PR disaster.

I remember it because it has come up here often and because Pub 525 says what is and is not income!

Dick - Who hasn't prepared a tax return since 1980 and then it was part of the con job I was running on Susan to convince her I was a good deal!

Dick

That is, taxed on the full sale price, which has probably increased because of those improvements, right?

And if it's a home, the improvements might well have raised the FMV from underwater to the purchase price, so there's no tax on sale (similarly if the exemption applies).

Seth

But I didn't "find and keep" it, I _bought_ it.

To take another example: I buy a box of books at an estate sale, for $10. One of them turns out to be a rare first edition worth $10,000. I say there's no tax until I sell it.

Seth

No, taxed on the sale price less the basis.

According to the text of a class I took recently, the IRS has ruled that improvements from the producers of home-makeover shows, even if completed within 14 days, are fully taxable as a prize or award. Not sure what the current status of this ruling is, whether it's been challenged, etc.

-Mark Bole

Interesting. I'd love to see the revenue ruling or whatever they came up with, to understand their rationale. I suppose they might justify it by saying it's compensation for services rather than merely leasehold improvements. But I just don't get what the justification would be.

Not having seen those shows, I wonder how much of what they do is classifiable as leasehold improvements. (For instance, replacing furniture wouldn't be.) I also wonder what the taxable amount is: the increase in FMV of the property? (According to every article on the topic I've seen, almost no improvements increase the selling price by anywhere near their cost.)

There's also the definition of "leasehold improvements": is that something done by the tenant for the tenant's benefit, that remains behind after the tenant leaves? That would make it arguable that the home makeover isn't a leasehold improvement.

Seth