Tenant improvements are often better cost segregation candidates than the buildings that contain them, because build-out dollars skew heavily toward finishes, millwork, and specialty systems rather than structure. The threshold question is ownership: under IRS Pub 946, the party that pays for and owns an improvement is the one who depreciates it, and depreciation runs over the property's MACRS recovery period, not the remaining lease term. A 5-year lease does not buy you 5-year depreciation.
Who depreciates what
If the landlord funds the build-out directly, the landlord owns and depreciates it. If the tenant pays, the tenant depreciates it. Cash tenant improvement allowances sit in between: for qualifying retail leases of 15 years or less, IRC section 110 lets the tenant exclude the allowance from income while the landlord treats the improvements as its own nonresidential real property. Getting this wrong means two parties depreciating the same drywall, so nail down ownership before anyone runs a study.
How a study carves up a build-out
Consider a tenant restaurant group spending $500,000 fitting out a leased shell. A cost segregation analysis might allocate roughly $170,000 to 5-year property, kitchen equipment hookups, grease waste lines, dedicated ventilation and electrical serving equipment, decorative lighting, and millwork; most of the remaining interior work, around $280,000, can be qualified improvement property under IRC section 168(e)(6), a 15-year life that is bonus-eligible under section 168(k); and perhaps $50,000 of structural work stays at 39 years. For property acquired after January 19, 2025, 100 percent bonus depreciation applies to both the 5-year and QIP buckets, so most of the $500,000 can be deducted in year 1 rather than trickling out over 39 years.
Ground leases and landlord-side studies
A lessee that constructs a building on ground-leased land depreciates the building itself over 39 years (or 27.5 if residential), again ignoring the lease term per Pub 946. Landlords who fund build-outs across a multi-tenant property can study each build-out as placed in service, and when a tenant leaves and the space is demolished, a partial asset disposition election lets the landlord write off the remaining basis of the abandoned improvements instead of carrying ghost assets.
Where the treatment tightens
QIP is interior and nonresidential only: enlargements, elevators, escalators, and internal structural framework are excluded by section 168(e)(6), and improvements to residential buildings never qualify. Improvements that benefit the building shell, new storefront glazing, roof work, HVAC replacements serving the whole building, stay long-life. And if the tenant abandons improvements at lease end, the remaining basis is generally a loss at that point, not earlier.
Amadae's cost segregation screen can model a build-out the same way it models a purchase: a screening estimate of the 5-year, QIP, and 39-year split and the first-year benefit. It is not an engineering study, but it tells landlord or tenant whether commissioning one is worth it, and Amadae prepares the return that uses the result.