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Qualified Improvement Property: Rules, Depreciation, and Tax Impact

August 28, 2026
Qualified Improvement Property: Rules, Depreciation, and Tax Impact

Qualified improvement property is any interior, nonresidential building improvement placed in service after the building itself was first placed in service under IRC §168(e)(6). If you've completed an interior build-out or renovation, flag it for CPA review now, since prior years may need correcting.

TL;DR:

  • Most interior improvements after a building's initial service qualify for 15-year QIP depreciation, enabling bonus depreciation unless a trade-off to 20 years is chosen.
  • Common qualifying work includes drywall, electrical, plumbing, and HVAC reconfigurations, but building enlargements or structural framework do not qualify.
  • Correcting past depreciation errors involves filing Form 3115 for automatic adjustment or amending the return, with the 15-year treatment restored by the 2020 CARES Act for post-2017 improvements.
  • Proper documentation, such as itemized contractor invoices and a fixed-asset schedule, is essential to support QIP claims and avoid classification disputes.
  • Conducting a cost segregation study and professional review before claiming QIP maximizes depreciation benefits and reduces IRS audit risk.

Table of Contents

What Is Qualified Improvement Property?

The statutory test under IRC §168(e)(6) has three parts: the improvement must be made by the taxpayer, it must be interior work, and it must go into a nonresidential building already placed in service. Three categories are carved out regardless of how interior they seem.

  • Building enlargements (adding square footage) never qualify.
  • Elevators and escalators are excluded, even when replaced entirely.
  • Internal structural framework (load-bearing walls, structural columns) stays out of QIP.

Common qualifying work includes drywall, drop ceilings, interior doors, electrical and plumbing reconfigurations, and HVAC distribution inside the space. Roofs, exterior walls, and residential rental units generally fall outside QIP entirely. Either the building owner or a tenant paying for the improvement can claim QIP, as long as that party actually incurred the cost.

How Does QIP Depreciation Work Under Current Law?

QIP's 15-year General Depreciation System life under §168(e)(6) is what makes it bonus-eligible. Under §168(k), only property with a recovery period of 20 years or less qualifies for bonus depreciation, so the 15-year classification is the gateway, not a footnote. Electing the Alternative Depreciation System pushes QIP to a 20-year life and permanently forfeits bonus eligibility, a trade-off worth modeling before any real-property-trade-or-business election under §163(j).

The legislative path here matters for anyone with pre-2020 renovations sitting on the books incorrectly:

  1. The Tax Cuts and Jobs Act intended 15-year treatment for QIP but a drafting omission left it at 39 years, killing bonus eligibility for 2018 and 2019 filings.
  2. The CARES Act retroactively fixed the omission back to January 1, 2018, restoring the 15-year life.
  3. Rev. Proc. 2020-25 gave taxpayers two paths to capture the correction: an automatic accounting method change or an amended return.
  4. OBBBA restored permanent 100% bonus depreciation for qualified property, including QIP, acquired and placed in service after January 19, 2025.

Where QIP Eligibility Gets Complicated

Most disputes over QIP classification come down to timing and mixed-use facts, not the core definition. A ground-up new construction project doesn't generate QIP, because the improvement has to happen after the building was first placed in service. A fit-out completed the same year the shell finishes could still qualify if the building was legally placed in service before the interior work wrapped.

  • The building must meet the nonresidential test, meaning apartment buildings and most residential rental property are excluded even when the interior work looks identical to a qualifying office renovation.
  • A mixed-use building (retail ground floor, residential units above) needs a facts-and-circumstances review of the nonresidential portion specifically.
  • Improvements between related parties under a lease can trigger limitations on who's entitled to claim the deduction, particularly when the lease terms don't reflect market rent.
  • A single construction invoice often mixes QIP-eligible interior work with excluded items like a new elevator, requiring cost allocation rather than an all-or-nothing treatment.

Pro Tip: Never assume a general contractor's invoice breakdown matches tax categories. A single "tenant improvement" line item routinely bundles structural framing costs with QIP-eligible finish work, and only a granular job-cost review separates the two correctly.

How Do You Fix Prior-Year QIP Depreciation Errors?

Taxpayers who depreciated post-2017 interior improvements over 39 years instead of 15 have two realistic paths back, and the right one depends on how the error happened.

  1. File Form 3115 as an automatic accounting method change when the QIP was properly capitalized but assigned the wrong recovery period. This captures the correction through a §481(a) adjustment, meaning the full catch-up depreciation hits the current year's return instead of requiring separate amendments for each affected year.
  2. Amend the original return when the statute of limitations hasn't closed and the taxpayer prefers to correct the specific year rather than take a lump-sum adjustment.
  3. Confirm Rev. Proc. 2020-25 applies to your fact pattern. It does not rescue costs that were expensed rather than capitalized in the first place. That's a different fix entirely, and one your CPA needs to evaluate before choosing a method.

The §481(a) catch-up can be substantial on a multi-year renovation, so coordinate the correction with your bookkeeping system before filing. A fixed-asset schedule that never reflected the 15-year life will need to be rebuilt alongside the return, and getting that reconciliation wrong is the kind of thing that draws IRS attention.

QIP vs. 39-Year Depreciation: A Worked Comparison

A $500,000 interior office build-out placed in service after January 19, 2025 shows the gap plainly.

These figures are illustrative only and depend on the taxpayer's actual marginal rate and full facts. The gap comes entirely from bonus eligibility, not the improvement itself changing value. One caveat worth remembering before celebrating that first-year number: QIP is §1245 property for recapture purposes, so selling the building later converts prior depreciation into ordinary income rather than capital gain. Model that recapture into any exit projection, not just the acquisition year.

Building a Defensible QIP Position

A cost segregation study is the standard tool for isolating QIP components inside a larger construction project, and it's worth ordering whenever a renovation or build-out exceeds roughly $250,000, or sooner if the project mixes structural and interior work. A properly engineered study should deliver an itemized, engineering-based allocation, not just a lump reclassification.

Documentation to keep on hand for any QIP claim:

  • Certificate of occupancy or other placed-in-service evidence for the building itself
  • Itemized contractor invoices separating interior finish work from structural components
  • Lease agreements when a tenant, not the owner, funded the improvement
  • A fixed-asset schedule that reflects the 15-year life from day one

Thetaxrefinery evaluates the bonus-versus-ADS trade-off against a client's broader depreciation posture, including how §163(j) interest limitations interact with a real-property-trade-or-business election, before recommending which way to go.

Pro Tip: If your lease requires the tenant to restore the space to original condition at termination, get that language reviewed before claiming QIP. Restoration obligations can affect who's entitled to the depreciation and complicate the eventual disposition analysis.

Tablet and keys on desk symbolizing lease restoration

How Thetaxrefinery Approaches QIP Planning

Thetaxrefinery treats a QIP opportunity as a modeling exercise, not a checkbox. The process starts with an assessment of the renovation or build-out, pulling job-cost detail and placed-in-service documentation before any depreciation method gets decided. From there, we model the bonus-versus-ADS trade-off against the client's full entity structure, since a real-property-trade-or-business election elsewhere in the business can quietly disqualify bonus eligibility on QIP claimed the same year.

Clients get a modeled comparison of first-year tax impact under each available method, along with an implementation plan covering fixed-asset schedule updates and, when needed, Form 3115 preparation. If a renovation project runs past routine numbers, that's the signal to bring in professional review before the return gets filed rather than after.

— Melissa

Get a QIP Review Before You File

Thetaxrefinery gives business owners and real estate investors something a once-a-year tax preparer typically can't: a modeled comparison of your actual depreciation options before the return locks in, not a generic explanation after the fact.

Thetaxrefinery

A QIP review through Thetaxrefinery covers the full scope of what a renovation or build-out actually needs: eligibility analysis under §168(e)(6), coordination with a cost segregation provider to isolate qualifying components, Form 3115 or amended-return support for prior-year corrections, and ongoing advisory so the next project gets planned correctly from the start. If your business is weighing financing for a tenant build-out, tenant improvement financing options are worth exploring alongside the tax analysis, and pass-through entity owners should also review how entity structure affects depreciation planning before locking in an election.

Bring your construction invoices, lease agreement, and placed-in-service date to an intake meeting, and Thetaxrefinery can typically turn around a modeled QIP impact within one planning cycle. Book a strategy session to find out what your renovation is actually worth on this year's return.

Hands preparing documents for tax strategy session

This article is general information, not a substitute for advice from a qualified financial advisor. Consult a qualified financial professional about your own circumstances before acting on anything here.

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