26 U.S.C. § 109 — Improvements by lessee on lessor’s property

This section is about landlords and tenant-built improvements. Normally, an increase in the value of your property counts toward your taxable income. This section makes an exception. When a lease ends, a lessor (landlord) of real property does not have to include in gross income the value that a lessee (tenant) added to the property by erecting buildings or making other improvements. Two limits matter here. First, this exclusion only applies to the value of the improvements themselves — it does not apply to rent. Rent the landlord received during the lease is still ordinary taxable income, the same as always. Second, the exclusion is tied to the termination of the lease: it's the value the landlord ends up with, from the tenant's construction work, once the lease is over, that doesn't count as income.