When it comes to maximizing tax benefits through cost segregation, an incredibly powerful asset category is Qualified Improvement Property (QIP). Understanding what qualifies as QIP and how it differs from other improvements can unlock accelerated deductions and improve cash flow for commercial real estate investors and business owners alike.
What Is Qualified Improvement Property?
Qualified Improvement Property refers to interior improvements made to nonresidential (commercial) buildings after the building was first placed in service.
These improvements must be:
- Made by the taxpayer,
- To the interior of the building,
- Placed in service after the date the building was first placed in service by any taxpayer.
QIP is not:
- Related to elevators and escalators,
- the internal structural framework being defined to include all load-bearing internal walls, and any other internal structural supports,
- or enlarging the building (any increase to the total volume of a building)
Why QIP Matters for Cost Segregation
Cost segregation is the process of identifying and reclassifying components of a building from long-term real property (39 years for commercial buildings) to shorter-life personal property (5, 7, or 15 years), accelerating depreciation and creating substantial tax savings.
QIP presents a unique opportunity:
- Even though it’s considered real property, its 15-year life means it’s eligible for bonus depreciation.
Unlike many structural improvements, QIP is depreciable immediately. In short, QIP bridges the gap between real property and personal property, qualifying for the accelerated deductions normally reserved for tangible personal property.
QIP vs. Other Improvements: Key Differences
| Feature | QIP (Qualified Improvement Property) | Other Improvements (Structural / Non-QIP) |
| Type of Property | Nonresidential, interior only | Can include structural or exterior upgrades |
| In-Service Timing | Must be placed after the building was in use | Can occur at any time |
| MACRS Life | 15 years | Typically 39 years |
| Bonus Depreciation Eligible? | Yes | No (if >20 year life) |
| Included in Cost Seg Analysis? | Yes | Yes, but often limited benefit |
Example: How QIP Enhances a Renovation Project
Imagine a commercial property owner renovates the interior of a retail strip center in 2024. The renovations include new lighting, drywall, flooring, HVAC ductwork, and updated restrooms, all inside the envelope of the building.
- Cost of Improvements: $650,000
- Portion Qualifying as QIP: $500,000
- Bonus Depreciation (2024): 60%
- Accelerated Deduction Year 1: $300,000
That $300,000 deduction can significantly reduce current-year tax liability, and it wouldn’t be available at all if the improvements were structural or exterior (such as roof replacement, façade work, or building expansion).
Common Mistakes When Evaluating Improvements
When reviewing renovation costs, many taxpayers and even preparers miss opportunities because they:
- Lump all improvements together and depreciate them over 39 years.
- Don’t distinguish between QIP and non-QIP items.
- Miss the opportunity to segregate components further into 5- and 7-year categories through a cost segregation study.
That’s where combining cost segregation and QIP analysis creates powerful results: QIP gives you a path to bonus depreciation on certain interior improvements, while cost seg finds even more opportunities in shorter-life assets.
How to Know If You Have QIP
You may have QIP if:
- You renovated the interior of a commercial building.
- The building was already in service before you started the renovation.
- You didn’t add new square footage or modify the structural framework.
- Improvements included items like drywall, electrical, plumbing, flooring, or ceiling finishes.
A cost segregation study will identify and isolate QIP items, ensuring you capture the maximum allowable depreciation and stay compliant with IRS guidance.
Final Thoughts: QIP and the OBBB law.
With the passage of the OBBB law, bonus depreciation has returned to 100% for QIP that meets the acquisition qualification. If less than 10% of the properties production costs are incurred before January 19, 2025, the property could be considered “acquired” in the 100% bonus period.
Want to make sure your renovations qualify for QIP and unlock all available tax savings?
Our team can review your improvement projects and provide a free benefit estimate to show what you could be missing.
Let’s talk—contact us today for a no-obligation QIP and cost segregation analysis.
