Purchaser’s Depreciation Rights in Property Subject to a Lease

This Note argues that the purchase of property subject to a lease may produce several types of depreciable interests. Part I of the Note examines the requirements for depreciability and the role that depreciation plays in tax law. It concludes that even where the method set out by Congress also accommodates other goals, depreciation primarily provides a way to recover costs during a depreciable asset’s income-producing life. Part II applies these principles to the task of determining whether improvements – for example, buildings on the property subject to the lease – are depreciable in the purchaser’s hands. It concludes that while the purchaser’s investment in an improvement made by the lessor is currently depreciable, depreciation of any investment in an improvement added by the lessee must await the termination of the lease. Part III examines the extent to which the lease itself may be depreciabie as a separate asset during the lease term. It concludes that the lease is of consequence for tax purposes only if it secures for a given asset rents that are more valuable than those available in the market. Finally, Part IV argues that the difficulty inherent in valuating potentially depreciable interests is an insufficient reason for denying their depreciability.