Improvements to leased property made by a lessee are includable in the lessor's gross income only if made in lieu of rent or if rent is reduced because of the improvements.

Question

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This is known as the "leasehold improvement rule" and is outlined in 26 U.S. Code § 109. It states that if the lessee makes improvements to leased property, the lessor may include the value of those improvements in their gross income only if the improvements were made in lieu of rent or if rent is reduced because of the improvements.

Improvements to Leased Property Made by a Lessee Are Includable