What is the difference between a land improvement and a leasehold improvement?

Definition of Land Improvement

A land improvement is a long-term (long-lived) asset resulting from a physical addition to a company's land. The cost of a land improvement is recorded in the general ledger account Land Improvements. Unlike the land, a land improvement has a limited useful life and therefore the cost of the improvement is depreciated over the useful life of the improvement.

Examples of Land Improvements

A few examples of land improvements include:

  • Paved parking areas
  • Driveways
  • Fences
  • Outdoor lighting

Definition of a Leasehold Improvement

A leasehold improvement is a permanent change to the property that a company (lessee/tenant) is leasing from the owner (lessor). The amount spent by the lessee/tenant is recorded in the long-term asset account Leasehold Improvements. Typically, the costs of the additions will be depreciated by the lessee/tenant over the useful life of the improvements or the remaining years of the lease, whichever is shorter.

Example of a Leasehold Improvement

An example of a leasehold improvement is the new walls and offices that the lessee makes to a warehouse that it leases from the owner (lessor). The lease states that all improvements to the building will belong to the owner of the building. If the walls and offices cost $90,000 and are expected to be useful for 15 years, but the lease expires at the end of 12 years, the company's (lessee's) financial statements will report depreciation expense of $7,500 in each of the 12 years remaining on the lease.