Qualified Improvement Property: A Tax-Saving Strategy for Commercial Real Estate Investors
What is Qualified Improvement Property (QIP)?
Qualified Improvement Property (QIP) is a tax classification for certain improvements made to the interior of nonresidential buildings. These improvements must be placed in service after the building itself was first placed in service.
QIP was introduced by the Tax Cuts and Jobs Act (TCJA) in 2017 to simplify how investors handle depreciation for commercial property improvements. The 2020 CARES Act fixed a key oversight by confirming that QIP has a 15 year recovery period, making it eligible for bonus depreciation. That change allowed property owners to write off 100% of qualified costs upfront through 2022, with phase downs beginning in 2023.
To qualify, improvements must be made by the taxpayer to the interior of a nonresidential building already in use. This distinction matters. For example, if you buy an old retail building and upgrade the interior lighting, that may qualify. But if you install an elevator or expand the building's footprint, it won't.
QIP is often confused with improvements to leasehold property, but not all tenant related improvements count. For example, improvements made under a tenant improvement allowance may qualify if they meet QIP standards and are paid for by the building owner. The key is who pays, what was improved, and when it was placed in service.
In short, QIP helps commercial real estate owners recover costs faster, and that timing can significantly impact your returns.
What Improvements Qualify as QIP?
Qualified improvement property refers to improvements made to the interior of a nonresidential building after it has been placed in service. That's the starting point. But three additional conditions determine whether an improvement qualifies.
1. QIP applies only to nonresidential buildings
Residential properties like apartments, condos, and single family homes do not qualify. Office buildings, retail spaces, warehouses, factories, and restaurants typically do.
For mixed use buildings, QIP eligibility depends on how the building is classified in the year of the improvement. If 80% or more of the rental income comes from residential units, it's treated as residential and doesn't qualify.
If you're exploring office, retail, or industrial properties to improve and hold, here are available listings to consider.
Commercial Real Estate For Sale
2. Improvements must be inside the building
Only interior improvements are eligible. This includes renovations to existing office or retail interiors, such as upgrading finishes, lighting, HVAC, or restrooms.
Exterior changes, like roofing, landscaping, or parking lot paving, are never QIP. Neither are structural upgrades or additions.
3. Timing matters: Improvements must be made after the building was placed in service
If you purchase an existing building and then renovate it, your improvements may qualify. But improvements made before the building was ever placed in service do not.
For example, if you purchase a warehouse that was built and placed in service in 2005, then complete a new office build out in 2024, that work may qualify. But if the improvement was already done by the previous owner, you can't claim bonus depreciation.
That's why it's important to clearly document what you do after taking ownership, including construction schedules and fit out cost breakdowns.
What Qualifies and What Does Not Qualify?
Only specific interior improvements qualify as QIP. Use the table below to compare improvements that typically qualify with those that do not.
| Improvements That Qualify as QIP | Improvements That Do Not Qualify as QIP |
|---|---|
| Drywall and acoustical ceilings | Building expansions or additions |
| Interior doors | Elevators and escalators |
| Plumbing fixtures (restrooms, kitchenettes) | Structural framework modifications |
| Electrical rewiring and lighting upgrades | Exterior improvements (e.g., roofing, paving) |
| HVAC systems that serve interior spaces | Improvements placed in service before the building |
| Fire protection and interior security systems | Improvements made by a previous owner |
Buildouts like spec suites often involve multiple interior upgrades that may qualify for QIP treatment. Make sure to break down every build out cost to capture eligible deductions.
If the space is part of a reciprocal easement agreement or includes shared elements like lobbies or signage, double check whether those fall outside QIP eligibility.
Finally, interior square footage calculations like usf vs rsf can help clarify where improvements are located, and how they should be categorized.
Why is QIP Important?
Qualified improvement property upgrades allow commercial investors to recover renovation costs over 15 years instead of the standard 39. This faster depreciation schedule can significantly boost upfront tax savings, free up cash flow, and improve key return metrics like IRR and cash on cash return.
Bonus depreciation offers even greater advantages
Thanks to the CARES Act fix, QIP placed in service between 2018 and 2022 qualified for 100% bonus depreciation. That means you could write off the entire improvement cost in year one. In 2025, the deduction is 40%, and it drops each year until it reaches 0% in 2027.
QIP can improve your after tax returns
When you factor in depreciation savings, your project may show a higher rate of return. That's especially true when you reinvest the tax savings or use them to lower your financing needs.
Bottom line: if you're renovating a commercial property, QIP lets you get more value from the dollars you're already spending. That's a strategic advantage worth planning for.
Tax Accounting Strategies for QIP (Form 3115 & Amendments)
If you missed claiming bonus depreciation on QIP in past years, you may still be able to recover it. The IRS offers two main options: amend prior returns or file Form 3115 to adjust your accounting method.
| Factor | Amended Return | Form 3115 |
|---|---|---|
| Purpose | Correct past filings | Change method of accounting |
| When to Use | Few years affected, and within amendment deadline | Longer depreciation error history or missed deadlines |
| Tax Years Affected | Only prior years (e.g., 2018-2020) | Applies to current year via catch-up |
| Effort Required | High - may require multiple amended returns | Moderate - single form filed with current return |
| Speed of Benefit | Moderate - tied to IRS processing speed | Fast - claim missed deductions now |
| Best For | Taxpayers with simple corrections and available resources | Taxpayers correcting large errors or seeking efficiency |
Option 1: Amend prior returns
For QIP placed in service in 2018, 2019, or 2020, amended returns can be filed to claim missed bonus depreciation. This may trigger a refund, but involves more paperwork and amending multiple years.
Option 2: File Form 3115 for a catch-up deduction
Form 3115 lets you claim the missed depreciation as a one-time deduction in the current year, known as a negative Section 481(a) adjustment. This avoids reopening past filings and is often the simpler option.
This strategy can also help offset gains in an opportunity zone or balance out other taxable events.
QIP can reshape your investment returns
Bonus depreciation affects ROI, internal rate of return, and cash on cash returns. In a syndication, early tax losses can enhance investor payouts.
Bottom line: if you've made interior upgrades since 2018, have your CPA review them. You might be able to unlock missed tax savings.
Strategic Planning & Timing for QIP Benefits
Timing your property improvements can significantly affect how much you benefit from QIP rules. Bonus depreciation is phasing out, so the earlier you act, the greater the potential tax savings.
Plan improvements around the phase out schedule
QIP improvements placed in service during 2025 qualify for only 40% bonus depreciation. That drops to 20% in 2026 and phases out entirely in 2027. If you're planning renovations, front loading eligible improvements now can help maximize deductions.
Build QIP into multi-year renovation plans
For multi-phase improvements, prioritize the QIP eligible items early. Pair this with long term projections like a discounted cash flow model to understand how faster write offs affect your total return over time.
In short, QIP is more than a tax rule, it's a timing tool. Use it wisely to turn routine upgrades into measurable investment upside.
Integrating QIP with Overall Investment and Financing Strategies
QIP isn't just a tax tool, it can help improve your financing position, enhance returns, and support long term planning.
Leverage QIP to support financing
Bonus depreciation reduces taxable income, which can enhance your debt coverage metrics and pro forma projections. This may help you secure better CRE loans during acquisition or refinance.
Connect tax strategy to property value
Tax savings can be reinvested in further improvements or reserves, lowering operational risk and potentially reducing occupancy cost over time. Track how these upgrades affect long term valuation using a commercial real estate value calculator to support your investment thesis.
Integrating QIP into your financing and capital planning isn't just smart, it's part of making every improvement dollar work harder for your bottom line.
Frequently Asked Questions
Can I still claim QIP depreciation from past years?
If you missed bonus depreciation on QIP placed in service in 2018-2020, you may still be eligible for a catch up deduction using Form 3115. This avoids amending past returns and lets you claim missed depreciation in your current year. Talk to a CPA about your eligibility.
Can tenant improvements qualify as QIP?
Yes, but only if they meet QIP criteria and are paid for by the taxpayer claiming the depreciation. Improvements made under a tenant improvement allowance may qualify if the owner pays for the work and it involves eligible interior upgrades.
