If a landlord gives a tenant money to make the space ready for use, is the payment taxable? It depends. Usually the payment is ordinary income to the tenant, who can then take deductions (e.g., depreciation) for the renovations. If the payment is a qualified construction allowance, it’s tax free. The tenant must lease retail space on a short-term lease (15 years or less) and use the payment to improve the property. The payment cannot exceed the amount spent by the tenant on the construction or improvement.