Real Estate Tax Calc
What QIP is
Qualified Improvement Property is any improvement to the interior of a nonresidential building made after the building was first placed in service. The CARES Act fixed the so-called retail glitch, giving QIP a 15-year recovery period — which makes it eligible for bonus depreciation.
What does not count
QIP excludes three things: enlargements of the building, elevators and escalators, and the internal structural framework. Roofs, HVAC, and exterior work are also outside QIP, though some may qualify for Section 179 separately.
Why it matters for investors
Because QIP is 15-year property, it can be written off immediately with bonus depreciation instead of being depreciated over 39 years. On a commercial renovation, correctly classifying interior work as QIP can move a large deduction into year one — often identified through a cost segregation study.
The retail glitch and why 15 years matters
When the Tax Cuts and Jobs Act consolidated several categories into QIP in 2017, a drafting error left QIP without an assigned recovery period, defaulting it to 39 years and — critically — out of bonus depreciation eligibility. This became known as the retail glitch. The CARES Act corrected it retroactively to 2018, assigning QIP a 15-year recovery period under MACRS. Because bonus depreciation is available for property with a recovery period of 20 years or less, that fix is exactly what makes QIP eligible for an immediate write-off rather than a slow 39-year one.
QIP after the OBBBA: 100% bonus is back
The rate applied to QIP follows the general bonus depreciation schedule. Under the One Big Beautiful Bill Act, 100% bonus depreciation was permanently restored for qualifying property acquired and placed in service after January 19, 2025. That means eligible QIP can once again be deducted in full in year one rather than spread over 15 years. Even without bonus, QIP recovers over 15 years using the straight-line method and the half-year (or mid-quarter) convention — far faster than the 39-year building shell it sits inside. IRS Notice 2026-11 provides the interim guidance for applying the restored rate.
Section 179 as an alternative for QIP
QIP can also be expensed under Section 179, which was expanded to cover it along with certain nonresidential building systems such as roofs, HVAC, fire protection, and security systems. Section 179 differs from bonus depreciation in two key ways: it is capped at an annual dollar limit that phases out for high-spending businesses, and it cannot create or increase a loss — it is limited to your business taxable income. Many owners use bonus depreciation for QIP because it can generate a loss, reserving Section 179 for items bonus does not reach or for fine-tuning the exact amount expensed.
A worked QIP example
Suppose you own a retail building and spend $180,000 renovating the interior — new partition walls, lighting, flooring, and finishes — none of it an enlargement, elevator, escalator, or structural framework. That $180,000 is QIP. As 15-year property eligible for 100% bonus, the entire $180,000 can be deducted in the first year, versus roughly $4,615 per year if it were stuck on a 39-year schedule. At a 32% marginal rate, the year-one QIP deduction is worth about $57,600 in tax savings pulled forward — a major cash-flow difference on the same spend.
Documenting and recapturing QIP
Because QIP sits between a full building and personal property, documentation matters. A cost segregation study or a detailed contractor breakdown should identify which portions of a renovation are QIP versus non-qualifying structural, exterior, or excluded work. Keep those records, because at sale QIP depreciation is subject to recapture. Depreciation on QIP is generally recaptured as unrecaptured Section 1250 gain, taxed at a maximum federal rate of 25%, so plan for it the same way you would for the building itself.
QIP versus 5- and 15-year cost-seg components
QIP is not the only accelerated bucket in a commercial renovation. A cost segregation study may also carve out 5-year personal property (movable equipment, decorative fixtures, specialty electrical serving equipment) and 15-year land improvements (parking lots, sidewalks, site lighting). QIP specifically captures the interior structural-adjacent improvements that would otherwise be trapped at 39 years. All three categories qualify for bonus depreciation, but classifying each correctly protects the deductions if the return is ever examined.
QIP versus a full building: the deduction gap
The reason QIP classification is worth chasing is the sheer size of the timing difference. A $500,000 interior renovation of a commercial space, if treated as a generic 39-year building improvement, yields roughly $12,820 of depreciation per year. Reclassified as QIP with 100% bonus depreciation, that same $500,000 is deductible entirely in year one. Even without bonus, 15-year straight-line QIP produces about $33,333 a year — more than double the 39-year figure. Across a holding period, correct QIP classification can be the difference between a deduction you barely notice and one that reshapes your first-year tax bill.
How to claim QIP on your return
QIP is reported on Form 4562 in the year the improvement is placed in service, entered as 15-year property in the MACRS section, with any bonus depreciation shown on the special depreciation allowance line. If you are electing Section 179 on the same or other assets, that goes in Part I of the form. The improvement then carries onto the depreciation schedule for the underlying business or rental activity — Schedule E, Schedule C, or the entity return. Keep the contractor invoices and any cost segregation report that establishes which portion of the project is QIP; the classification is only as strong as the documentation behind it.
Timing a renovation for the deduction
Because QIP must be placed in service to be deducted, the completion and readiness date of the renovation controls the tax year. A project substantially finished and put into use before year-end can generate a first-year deduction now, while the same project completed a few weeks later shifts the entire benefit into the following year. For a large renovation, phasing portions into service — a completed floor or wing that is genuinely ready for use — can begin depreciation on that portion even while other work continues. As always, readiness must be real, not merely claimed.
QIP and leasehold improvements
Interior improvements made to leased nonresidential space frequently qualify as QIP, whether the landlord or the tenant pays for them, as long as they meet the interior-improvement test and are not enlargements, elevators, escalators, or structural framework. This matters for both sides of a commercial lease: a tenant building out office or retail space, and a landlord funding a tenant-improvement allowance, may each have QIP eligible for accelerated depreciation on the portion they own and place in service. The old requirement that improvements be made under a lease was removed when QIP replaced the earlier qualified leasehold improvement category, which broadened what counts.
Common QIP mistakes to avoid
Three errors recur. First, treating an entire renovation as QIP when part of it is excluded structural, exterior, or enlargement work — only the qualifying interior portion counts. Second, applying QIP to a residential building, where the category does not exist. Third, missing QIP on a prior return: if you depreciated interior improvements over 39 years when they should have been 15-year QIP, you may be able to catch up the missed depreciation through an accounting-method change on Form 3115 rather than amending years of returns. A cost segregation professional can identify overlooked QIP on properties you already own.
Frequently asked questions
Is residential rental eligible for QIP?
No. QIP applies only to nonresidential (commercial) buildings. Residential interior improvements follow different rules.
Can QIP get bonus depreciation?
Yes. Because QIP is 15-year property, it qualifies for bonus depreciation at the rate in effect for the year placed in service.
How do I identify QIP?
A cost segregation study separates QIP and other short-life assets from the building shell so each is depreciated correctly.
What is the recovery period for QIP?
15 years, straight-line, under MACRS — after the CARES Act corrected the TCJA drafting error known as the retail glitch. Before the fix, QIP defaulted to 39 years and could not get bonus depreciation.
Can I use Section 179 instead of bonus depreciation on QIP?
Yes. QIP qualifies for Section 179, which also covers certain nonresidential systems like roofs and HVAC. But Section 179 is capped at an annual limit and cannot create a loss, while bonus depreciation can — so many owners use bonus for QIP and reserve Section 179 for other items.
Does the 100% bonus rate apply to QIP now?
Yes, for QIP acquired and placed in service after January 19, 2025, following the One Big Beautiful Bill Act's permanent restoration of 100% bonus depreciation.
Is a new roof QIP?
No. Roofs are excluded from QIP, along with exterior work, enlargements, elevators, escalators, and the internal structural framework. However, a roof on a nonresidential building may be eligible for Section 179 expensing.
How do I claim QIP I missed in a prior year?
If you depreciated qualifying interior improvements over 39 years instead of 15-year QIP, you can generally catch up the missed depreciation through an accounting-method change on Form 3115, taking the cumulative adjustment in the current year rather than amending each prior return.
Do leasehold improvements qualify as QIP?
Often yes. Interior improvements to leased nonresidential space can be QIP whether the landlord or tenant pays, as long as they are not enlargements, elevators, escalators, or structural framework. The old requirement that they be made under a lease no longer applies.
How much faster is QIP than 39-year depreciation?
Dramatically. A $500,000 interior renovation depreciated over 39 years yields about $12,820 a year; the same amount as 15-year QIP is roughly $33,333 a year, and with 100% bonus depreciation the entire $500,000 is deductible in year one. Correct QIP classification can pull a very large deduction forward.
Is QIP recaptured when I sell?
Yes. QIP depreciation reduces your basis and is recaptured at sale, generally as unrecaptured Section 1250 gain taxed at a maximum federal rate of 25%. Accelerating the deduction is a timing benefit, not a permanent exemption, so factor recapture into a sale decision.
Sources
- IRS Publication 946 — How to Depreciate Property
- IRS — Cost Segregation Audit Techniques Guide
- IRS Publication 527 — Residential Rental Property
Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.