Qualified Improvement Property: Tax Rules and Benefits
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.
Most commercial investors depreciate interior renovation costs over 39 years by default. QIP can cut that timeline to less than half that and, when combined with bonus depreciation, allow you to write off qualifying expenses entirely in year one. The difference can reshape your after-tax planning on a deal you were already planning to make.
QIP was introduced by the Tax Cuts and Jobs Act (TCJA) in 2017 to simplify how investors handle depreciation for commercial property improvements. However, a drafting error left its depreciation period unresolved until the 2020 CARES Act confirmed a 15-year recovery period, making QIP eligible for bonus depreciation. The TCJA had already set a phase-down that would have eliminated bonus depreciation entirely by 2027, but the One Big Beautiful Bill Act (OBBBA) reversed that and permanently restored 100% for qualified property acquired and placed in service after January 19, 2025.
QIP is often confused with bonus depreciation or leasehold improvements, but not all tenant-related improvements count. 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.
What Improvements Qualify as QIP?
Four conditions determine whether an improvement qualifies as QIP.
In order for an improvement to qualify as QIP, it must be a nonresidential building, the improvement must be made inside by the building’s owner after it was placed in service.
1. QIP applies only to nonresidential buildings.
Residential properties like apartments, condos, and single-family homes do not qualify. However, if you were to buy an office, retail space, warehouse, factory, or restaurant, then improvements typically would qualify.
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.
2. Improvements must be inside the building.
This includes renovations to existing office or retail interiors, such as upgrading finishes, lighting, HVAC, or restrooms.
Note that partial systems can split eligibility. In an HVAC renovation, for example, interior ductwork and control systems may qualify as QIP, but rooftop units do not. Exterior changes like roofing, landscaping, and parking lot paving are never QIP. Neither are structural upgrades or additions.
3. Improvements must be made after the building was placed in service.
If you buy a commercial building that was already built and then renovate it, your improvements may qualify, but improvements made before the building was placed in service do not. Document construction schedules and fit-out cost breakdowns to clearly establish when work was completed.
4. Improvements must be made by you.
To qualify, improvements must be made by the taxpayer to the interior of a nonresidential building already in use. You can only claim QIP on improvements you commission and pay for, not improvements made before you bought the building. If you purchase a building that was recently renovated by the prior owner, those improvements do not transfer as QIP.
For example, if you buy a retail building and upgrade the interior lighting after closing, that work may qualify. But if the seller upgraded the lighting to entice you to purchase the building, that work would not qualify.
Buildouts like spec suites often involve multiple interior upgrades that may qualify for QIP treatment. Break down every build out cost line by line, as mixed projects that include both qualifying and non-qualifying work need to be tracked separately to capture the full deduction.
If you're evaluating commercial properties where interior improvements could generate QIP deductions, here are available listings in your area.
Commercial Real Estate For Sale
What a qualifying improvement looks like in practice:
| 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 (e.g., ductwork, controls) | Rooftop HVAC units and other exterior mechanical systems |
| Fire protection and interior security systems | Improvements made by a previous owner |
How Do Depreciation Elections Affect QIP?
Your depreciation system determines whether QIP qualifies for bonus depreciation.
Most investors will depreciate QIP under the General Depreciation System (GDS), which assigns a 15-year recovery period and allows bonus depreciation. However, if you elect real property trade or business status, which removes the limit on how much business interest you can deduct, you must instead use the Alternative Depreciation System (ADS) for QIP. ADS extends the recovery period to 20 years and eliminates bonus depreciation eligibility.
That's a significant trade-off, and one that deserves a closer look post-OBBBA, as changes to how business interest limits are calculated may affect whether the election makes sense for your situation. Run the numbers with a CPA before committing.
ADS can help investors carrying significant debt, but it costs you accelerated depreciation on QIP. Depending on your financing and tax position, one benefit may outweigh the other, so model both scenarios. Losing bonus depreciation on a large interior renovation can meaningfully affect your first-year deduction and overall return.
Use this table for a high-level comparison of GDS vs. ADS:
| General Depreciation System (GDS) | Alternative Depreciation System (ADS) | |
|---|---|---|
| Recovery Period | 15 years | 20 years |
| Depreciation Method | Straight-line | Straight-line |
| Bonus Depreciation Eligible | Yes | No |
| When It Applies | Default for most investors | Required if you elect real property trade or business status under §163(j) |
| Best For | Investors prioritizing accelerated deductions | Investors with significant debt loads seeking full interest deductibility |
Why Does QIP Matter for Your Investment Returns?
Qualified Improvement Property accelerates cost recovery in ways that directly affect your bottom line.
QIP's accelerated depreciation directly improves after-tax returns by front-loading deductions.
Qualified improvement property upgrades allow commercial investors to recover renovation costs over 15 years instead of the standard 39 under straight-line depreciation. That faster schedule boosts upfront tax savings, frees up cash flow, and bolsters return metrics like internal rate of return (IRR) and cash-on-cash return.
Bonus depreciation makes QIP even more valuable.
The OBBBA permanently restored 100% bonus depreciation for qualified property acquired and placed in service after January 19, 2025. For QIP, that means you can write off the entire cost of eligible interior improvements in year one rather than spreading deductions over 15 years.
Bonus depreciation rates for QIP by year. The TCJA set a phase-down beginning in 2023. The OBBBA permanently restored 100% bonus depreciation for qualified property acquired and placed in service after January 19, 2025.
QIP affects after-tax returns.
When you factor in depreciation savings, a renovation project may show a materially higher rate of return, especially when you use those tax savings to reinvest or reduce financing needs.
In short, QIP lets you get more value from dollars you're already spending on improvements, and it should be part of how you underwrite an asset from the start.
How Do You Maximize Qualified Improvement Property Tax Benefits?
Cost segregation and documentation determine how much of your renovation qualifies.
Large renovation projects rarely consist entirely of QIP-eligible work. A single build-out might include interior upgrades that qualify, structural modifications that don't, and exterior work that's excluded entirely. Without a formal cost segregation study, those costs get lumped together and depreciated over 39 or 27.5 years by default, depending on the property type, which leaves deductions on the table.
A cost segregation study breaks down project costs into their correct asset classes to help you set your expense capitalization strategy. It separates shorter-life personal property and land improvements from structural components that depreciate over decades. In the process, the study will identify QIP to give you a defensible, itemized breakdown of what qualifies for accelerated depreciation.
Maintain clean records to maximize tax benefits.
Even with a cost segregation study, your deductions depend on clean records. At minimum, maintain:
- Invoices and contracts tied to specific scopes of work
- Construction schedules showing start and completion dates by phase
- Placed-in-service dates for each improvement area
Keep in mind, depreciation begins when an improvement is ready and available for its intended use, not when the final punch list item is signed off and not when a tenant moves in. If you have a phased renovation, each phase may have a different placed-in-service date, which affects which tax year the deduction falls in.
Frequently Asked Questions
Does the OBBBA affect QIP already placed in service before January 19, 2025?
No. The OBBBA's permanent 100% bonus depreciation applies to qualified property acquired and placed in service after January 19, 2025. Improvements placed in service before that date are subject to the prior phase-down schedule: 60% in 2024 and 40% in 2025 under the old rules for property placed in service before January 19, 2025. If you have improvements that fall in that window, talk to a CPA about whether any catch-up options are available. Note that the OBBBA also modified the ATI calculation used to determine business interest limits, which may reduce or eliminate the benefit of making the §163(j) election for some investors.
Can I Claim QIP Deductions on Past Renovations?
If you made interior improvements between 2018 and 2022 and did not claim bonus depreciation at the time, you may be leaving real money on the table. Talk to a CPA about your options. Depending on how many years are affected, you may be able to file an amended return or use Form 3115 to claim missed depreciation as a catch-up deduction in your current tax year. The window for older catch-ups is narrowing, but unclaimed deductions from recent years may still be recoverable.
Does electing real property trade or business status affect my QIP deductions?
Yes, and this is a trade-off investors often overlook. If you elect real property trade or business status to opt out of the business interest deduction limit under §163(j), you must use the Alternative Depreciation System (ADS) for QIP. ADS extends the recovery period to 20 years and disqualifies QIP from bonus depreciation entirely. The interest deduction benefit may or may not outweigh losing accelerated depreciation, depending on your debt load and tax position. Run the numbers with a CPA before making this election.
Can a tenant claim QIP on improvements they pay for out of pocket rather than through a TIA?
Yes. A tenant can claim QIP on interior improvements they pay for directly, as long as the improvements meet all other eligibility criteria. The key is who pays. If the landlord funds the work through a tenant improvement allowance, the landlord owns the improvement and claims the deduction. If the tenant pays out of pocket, the tenant claims it. The same improvement can only be claimed by one party.
Does QIP apply to properties held in an LLC or partnership?
Yes. QIP eligibility is not limited to individual owners. LLCs, partnerships, and S corporations can all claim QIP deductions, with the tax benefit passed through to members or partners according to the entity's ownership structure. The same eligibility rules apply regardless of how the property is held.
