What Does Qualified Improvement Property (QIP) Mean?
When a business renovates a commercial building, the tax result depends heavily on how the work is classified. Some costs are subject to a long depreciation schedule, while others may qualify for faster cost recovery, including a large first-year deduction.
That’s where Qualified Improvement Property (QIP) comes in.
Quick answer: QIP generally means interior improvements you make to an existing nonresidential building after it was first placed in service, excluding building enlargements, elevators/escalators, and internal structural framework. When properly identified, QIP is typically a 15-year property under GDS (and a 20-year property under ADS) and may be eligible for accelerated depreciation, depending on the rules and elections that apply.
What Is Qualified Improvement Property (QIP)?
The Internal Revenue Code defines QIP as any improvement made by the taxpayer to the interior portion of a building that is nonresidential real property, as long as the improvement is placed in service after the building was first placed in service.
In plain English: if you upgrade the inside of an existing commercial building you use in your business (or your tenant space), it may be QIP if it fits the rules.
What Does & Doesn’t Qualify as QIP?
What Qualifies
To be treated as QIP, the improvement generally must meet all of the following:
Interior only. It must be to the interior portion of the building.
Nonresidential building. The building must be nonresidential real property (e.g., office, retail, industrial).
Placed in service after the building. The improvement must be placed in service after the building was first placed in service.
Made by the taxpayer. You generally can’t “inherit” QIP from a prior owner’s renovations. QIP is the improvement you make.
Common examples that often qualify (if non-structural): interior drywall/partitions, interior doors, ceilings, flooring, lighting, interior plumbing/electrical work, fire protection systems, and other interior finishes, so long as they’re not part of the excluded categories below.
What Doesn’t Qualify
The Code specifically excludes interior improvements when the costs are attributable to:
Enlargement of the building (expansions/additions)
Elevators or escalators
Internal structural framework (generally, load-bearing structural components)
Also, while they may be depreciable in other ways, these are not QIP:
Exterior work (roofing, façade, exterior walls, exterior doors/windows)
Land improvements (parking lots, landscaping, site work)
A quick real-world example
A tenant builds out a new office suite: new non-load-bearing partitions, lighting, wiring, ceiling grid, flooring → often QIP.
The same project adds an elevator or expands the building's footprint → those portions are not QIP.
Why QIP Matters: Bonus Depreciation & Tax Savings
1) QIP can be much faster than a 39-year building depreciation
Under current guidance, QIP placed in service after December 31, 2017, is depreciated:
15-year recovery period under GDS (straight-line), and
20-year recovery period under ADS (straight-line).
That difference alone can materially change your deductions and cash flow.
2) QIP may be eligible for 100% bonus depreciation (timing matters)
Recent IRS guidance explains that the new law provides a permanent 100% additional first-year depreciation deduction for qualified property acquired and placed in service after January 19, 2025, with transition rules (including an election to claim a reduced percentage in the first tax year ending after that date).
Whether your QIP is “qualified property” for bonus depreciation depends on meeting the technical requirements and properly documenting acquired and placed-in-service dates.
When QIP Might Not Work: Common Pitfalls to Watch Out For
Mixing QIP with non-QIP costs (and not separating them): Large renovations often include a mix of interior, exterior, structural, and expansion work. If costs aren’t tracked separately, you can lose the benefit on the portion that does qualify.
Misclassifying the structural framework or expansions: If something is truly structural or an enlargement, it’s out, no matter how “interior” it feels.
Placed-in-service misunderstandings: Depreciation generally starts when property is ready and available for its intended use, not necessarily when the last punch-list item is done, and not necessarily when it’s first used.
ADS can eliminate bonus depreciation: If you’re required to use ADS for the property, the IRS states you cannot claim any special depreciation allowance (bonus depreciation) on that property. This comes up frequently in real estate scenarios (for example, certain elections/structures can push depreciation into ADS).
Buying a building with recent renovations: If the prior owner made improvements before you acquired the property, those costs generally don’t become “your” QIP just because you bought the building. QIP is defined as an improvement made by the taxpayer.
How to Maximize QIP for Your Property
Document thoroughly: scope of work, invoices, contracts, and clear placed-in-service dates for each area/phase.
Segregate costs: Track QIP vs. non-QIP categories (exterior, structural, expansion, land improvements) to avoid contaminating the bucket.
Consider cost segregation: a well-done study can help identify which parts of a project are QIP and which may fall into other shorter-life asset classes (when appropriate).
Plan around elections and depreciation system: ADS vs. GDS choices/requirements can drive whether accelerated depreciation is available.
Review acquisition + placed-in-service timing for bonus depreciation: recent IRS guidance makes timing especially valuable for projects placed in service after January 19, 2025.
How Eshel, Aminov & Partners LLP Can Help
Qualified Improvement Property (QIP) remains one of the most valuable tools for commercial real estate owners, landlords, and businesses looking to renovate or upgrade interiors. By correctly classifying qualifying interior improvements as QIP and taking advantage of accelerated depreciation, you may significantly improve cash flow, reduce tax burden, and make your real estate investments more efficient.
If your business is considering renovations or interior improvements to a nonresidential property, now is a good time to review the planned scope, segregate costs, and evaluate QIP eligibility. Contact our team to schedule a consultation and see how we can help.
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