One income tax issue that has given rise to much confusion and some litigation over the years is the treatment of amounts, often referred to as tenant allowances, that are paid by a landlord to a tenant to finance the construction and "build-out" of facilities by the tenant for its use.
Background
Generally, if tenant allowances are provided to fund the construction of improvements that will be owned by the landlord, the amounts are not includible in the tenant's income and are included in the landlord's investment in the property subject to depreciation. Conversely, if funds paid by a landlord to a tenant in connection with entering into a lease are unrestricted as to use, or are required to be used by the tenant to construct improvements or acquire fixtures that will be owned by the tenant, those amounts are generally includible in the tenant's income. However, determining the true owner of property for tax purposes is often not a simple task.
