In a commercial lease, the split between capital improvements and repairs usually breaks along two lines: repairs keep the space in its current working condition and typically fall to the tenant, while capital improvements provide a lasting upgrade to the building and typically fall to the landlord. That default gets rewritten constantly by lease language, pass-through clauses, and IRS rules that decide whether a dollar spent is deductible now or depreciated for decades. Getting the classification wrong can inflate a tax bill, blow up an operating budget, or land both sides in a landlord-tenant dispute.
What Counts as a Repair and What Counts as an Improvement
The IRS treats any expenditure that keeps property in its current working condition as a deductible repair. Amounts paid to repair or maintain tangible property do not have to be capitalized as long as they do not improve the property beyond its existing state.1eCFR. 26 CFR 1.162-4 – Repairs Fixing a leaky faucet, patching drywall, replacing a broken window, repainting a wall. Those are repairs. The cost hits the current year’s tax return.
Capital improvements provide a benefit that goes beyond restoring the property to where it was. Practitioners call the sorting rule the BAR test: an expenditure is a capital improvement if it results in a betterment, an adaptation to a new or different use, or the restoration of a major component or substantial structural part.2Internal Revenue Service. Tangible Property Final Regulations A complete roof replacement is a restoration. Converting a warehouse into retail space is an adaptation. Installing a new elevator where none existed is a betterment. All three must be capitalized.
Building Systems Are Analyzed Separately
The IRS does not treat a building as one unit. The structure and each major system are evaluated on their own. The recognized systems are plumbing, electrical, HVAC, elevators, escalators, fire protection and alarm, gas distribution, and security.2Internal Revenue Service. Tangible Property Final Regulations Replacing one component of the HVAC system can be a repair; replacing the entire system is almost certainly a restoration that must be capitalized. The question is whether the work affects a major component of that particular system, not whether it seems significant relative to the whole building.
Two Safe Harbors That End the Argument
The de minimis safe harbor lets you expense items costing $2,500 or less per invoice ($5,000 with audited financial statements) without analyzing whether they technically qualify as improvements.2Internal Revenue Service. Tangible Property Final Regulations An $1,800 thermostat upgrade can be written off immediately regardless of whether it improves the HVAC system.
The routine maintenance safe harbor covers recurring work you expect to perform to keep property in ordinary operating condition. For building structures and systems, the work must be something you reasonably expect to do more than once during the first ten years after the property is placed in service.2Internal Revenue Service. Tangible Property Final Regulations Cleaning gutters, servicing boilers, replacing filters. It does not apply to betterments, so if the maintenance also upgrades capacity or efficiency, it loses safe harbor protection.
Why the Classification Changes Your Tax Bill
Repairs produce an immediate deduction. Capital improvements must be capitalized and recovered over time through depreciation.3Office of the Law Revision Counsel. 26 USC 263 – Capital Expenditures The recovery period depends on what type of property received the work.
The building structure of a nonresidential commercial building, including roof, walls, floors, and foundation, depreciates over 39 years under the Modified Accelerated Cost Recovery System. That is a long wait for the tax benefit on a major structural expense. Interior, non-structural improvements to commercial space, classified as qualified improvement property, get a 15-year recovery period.4Office of the Law Revision Counsel. 26 USC 168 – Accelerated Cost Recovery System Think new interior walls, upgraded lighting, or expanded restrooms in a retail or office space.
The One Big Beautiful Bill Act, signed in July 2025, permanently restored 100 percent bonus depreciation for qualified property placed in service after January 19, 2025.5Internal Revenue Service. Treasury, IRS Issue Guidance on the Additional First Year Depreciation Deduction Amended as Part of the One Big Beautiful Bill For qualified improvement property, a tenant or landlord who spends $200,000 on an interior buildout can now deduct the full amount in the year the work is completed rather than spreading it over 15 years. That changes the math on who is willing to fund a buildout, and it should change how tenant improvement allowances are negotiated.
Who Pays Under Which Kind of Lease
The lease type sets the starting point. In a full-service or gross lease, the landlord bundles most operating costs, including repairs and maintenance, into base rent. In a triple net lease, the tenant picks up repair costs, property taxes, insurance, and common area maintenance on top of base rent. Most leases sit somewhere between the two, and the specific language controls far more than the label.
Regardless of the label, tenants are almost always responsible for non-structural repairs inside their own space: fixing a running toilet, replacing bulbs, patching minor wall damage, maintaining interior finishes. Landlords retain responsibility for the building envelope, structural elements, and shared mechanical systems. That split protects the landlord’s long-term asset while keeping the tenant accountable for wear caused by their own operations.
How Capital Improvement Costs Get Pushed to Tenants
Capital improvements that benefit the whole building, like a new roof or an upgraded fire suppression system, are typically funded by the landlord. The cost does not always stay there. Many triple net and modified gross leases let the landlord amortize a capital improvement over its useful life and charge tenants a monthly share during their remaining lease term. A $300,000 roof replacement with a 20-year useful life amortizes at $15,000 per year, and a tenant with a 10-year lease pays its pro-rata share of that annual charge for the duration of its occupancy. The tenant only pays for the portion of the asset’s useful life it actually consumes.
Base Year and Expense Stop Provisions
Many commercial leases cap the landlord’s exposure to rising operating costs through a base year or expense stop provision. Under a base year stop, the landlord covers operating expenses up to the amount incurred in the first year of the lease. In later years, the tenant pays its proportionate share of any increase above that baseline. If expenses drop below the base year amount, the landlord absorbs the difference. The catch sits in the definition of operating expenses: a broadly drafted definition can pull capital improvement amortization charges into the pass-through calculation, increasing what the tenant owes.
CAM Charges and Audit Rights
Common area maintenance charges cover shared expenses like parking lot upkeep, landscaping, elevator maintenance, and lobby cleaning, allocated to tenants based on their share of leasable square footage. Landlords control the spending; tenants have limited visibility. That combination produces disputes.
Well-drafted leases include an audit right that lets the tenant examine the landlord’s books. These rights are contractual, not automatic. The typical structure gives the tenant a window of 60 to 180 days after receiving the annual reconciliation to request an audit, and that deadline is usually firm. Miss it and the right to challenge that year’s charges is waived. Most audit clauses allow review of the prior three years and limit audits to once per year. Some require a licensed CPA rather than an internal review, and many prohibit contingency-fee auditors. If the lease you are signing has no audit clause, negotiate one in.
Tenant Improvement Allowances
Improvements specific to a tenant’s business are usually handled through a tenant improvement allowance. The landlord provides a set dollar amount per square foot for the tenant to customize the space. Current allowances typically run from $15 to $60 per square foot depending on building class, market conditions, and lease term. Class A office in strong markets may offer $40 to $60 or more for creditworthy long-term tenants; Class B space in secondary markets often lands between $15 and $30. Costs above the allowance are the tenant’s, either paid upfront or amortized into rent. Because most of this work qualifies as qualified improvement property, the restored 100 percent bonus depreciation can substantially cut the after-tax cost for whichever side funds it.5Internal Revenue Service. Treasury, IRS Issue Guidance on the Additional First Year Depreciation Deduction Amended as Part of the One Big Beautiful Bill
ADA Accessibility Improvements
The Americans with Disabilities Act holds both the landlord and the tenant fully responsible for compliance. A lease can assign the practical duty of removing barriers to one side, but that allocation is only effective between the two of them. If either party fails to comply, an affected individual can sue both.6U.S. Department of Justice. ADA Title III Technical Assistance Manual
When a commercial space undergoes alterations, the altered portion must be made accessible to the maximum extent feasible. If the alteration affects an area containing a primary function, the path of travel to that area, along with restrooms, telephones, and drinking fountains serving it, must also be made accessible. The cost of path-of-travel work is limited to what is proportionate to the overall alteration cost.7Office of the Law Revision Counsel. 42 USC 12183 – New Construction and Alterations in Public Accommodations and Commercial Facilities A tenant planning a significant interior renovation should budget for accessibility upgrades to adjacent areas, not just the space being remodeled.
Casualty Damage and Insurance
Fire, flooding, storms, and similar casualty events create repair obligations that sit outside the normal maintenance framework. Most commercial leases assign the landlord responsibility for restoring the building structure, mechanical systems, roof, foundation, and windows to their pre-loss condition. The tenant is responsible for replacing its own personal property, furnishings, fixtures, and equipment unless the landlord’s negligence caused the loss.
Insurance proceeds fund most casualty repairs, and the allocation of those proceeds is where things get contentious. Some landlords make their repair obligation contingent on actually receiving insurance payments, which can delay restoration for months while claims are processed. A well-negotiated casualty clause requires the landlord to begin repairs within a specified period after the loss regardless of insurance payout timing, and sets a deadline for completion. If the lease shifts any restoration responsibility to the tenant, the tenant should be entitled to receive the corresponding insurance proceeds.
Most casualty provisions also include a termination right. If damage is severe enough that the landlord cannot reasonably restore the premises within the specified timeframe, either party can typically terminate. Without it, a tenant can be locked into a lease for a building that sits empty for a year during reconstruction.
When Neglected Repairs Become Constructive Eviction
A landlord’s failure to maintain the property can reach a threshold where the tenant is legally treated as having been evicted, even though no one changed the locks. Constructive eviction occurs when the landlord’s actions or inaction substantially interfere with the tenant’s ability to use the premises for their intended purpose. A persistent roof leak that floods inventory, a failed HVAC system in a data center, a severe pest infestation that drives customers away, all can cross this line.
The requirements are strict. The tenant must notify the landlord and give a reasonable opportunity to fix the problem. If the landlord fails to act, the tenant must vacate the affected space within a reasonable time. A tenant who stays and stops paying rent will likely lose in court. The vacating requirement can be partial: if only one floor of a multi-floor space is unusable, the tenant can vacate that floor and pursue a claim for partial constructive eviction. A tenant who successfully establishes constructive eviction is relieved of rent for the affected space.
Documentation is decisive. Written repair requests sent by a method that creates a delivery record, photos of the damage, logs of follow-up communications, and records of business losses caused by the condition all strengthen the claim. Verbal complaints and casual emails rarely hold up in litigation.
End-of-Lease Restoration and Trade Fixtures
When a lease expires, most agreements require the tenant to return the space to a specified condition. Restoration obligations often go further than tenants expect: demolishing non-structural interior walls the tenant added, removing all fixtures and wiring, stripping flooring down to bare concrete, repainting to the building’s standard finish. In some cases the tenant must remove improvements it did not even build, particularly after assuming the lease from a prior tenant. The landlord frequently retains the right to perform the restoration itself if the tenant fails to do so, and bill the tenant for the cost.
Trade fixtures are the exception to the general rule that attached improvements become the landlord’s property. Display cases, commercial refrigerators, custom counters, and signage that a tenant installs for business operations typically remain the tenant’s property even after attachment. The tenant has the right to remove these items before the lease expires but must repair any damage caused by removal. Trade fixtures left behind after surrender risk being treated as abandoned property.
The line between a trade fixture the tenant owns and a leasehold improvement the landlord owns is not always obvious. A built-in reception desk might be a trade fixture in one context and a permanent improvement in another, depending on how it was installed and what the lease says. Addressing the classification explicitly in the lease, ideally with a schedule listing removable items, prevents a fight at the end of the term when neither side has any incentive to compromise.