Leasehold improvements generally have a 15-year depreciation life when the work is qualified improvement property (QIP). Interior work that fails the QIP test usually falls back to the 39-year nonresidential building life. Separately classified personal property can use a 5- or 7-year life.

QIP uses the General Depreciation System (GDS) straight-line method over 15 years. Under IRS Notice 2026-11, eligible QIP acquired and placed in service after January 19, 2025, can receive 100% federal bonus depreciation. Timing, depreciation-system requirements, and elections can change the result.

A build-out can contain several asset categories. Separate eligible interior improvements from personal property and excluded building costs before calculating your deduction.

Key takeaways

• QIP has a 15-year GDS life, while non-QIP improvements to a nonresidential building generally use 39 years.
• A leasehold improvement is not automatically QIP or automatically eligible for bonus depreciation.
• QIP covers qualifying nonresidential interior improvements you make and place in service after the building was first placed in service.
• Building enlargements, elevators and escalators, and the internal structural framework are excluded from QIP.
• Qualifying property acquired and placed in service after January 19, 2025, can receive 100% bonus depreciation.
• The lease term does not set the depreciation life, but an improvement abandoned at lease end can produce a deductible loss.
• Required ADS treatment can remove bonus eligibility, and loss limitations can delay the tax benefit.

What is the depreciation life of leasehold improvements?

Leasehold improvements that qualify as QIP have a 15-year GDS depreciation life and a 20-year Alternative Depreciation System (ADS) life. Improvements that do not qualify use the life of their own asset class.

Depreciation for leasehold improvements depends on classification, not the label on the invoice. IRC §168 lists "any qualified improvement property" as 15-year property. The same section assigns 39 years to nonresidential real property and 27.5 years to residential rental property.

Publication 946 confirms that QIP placed in service after 2017 belongs in the 15-year class and uses straight-line depreciation. It also places land improvements in the 15-year class. For a broader list of classes, see our guide to asset recovery periods for real estate investors.

Why older articles may show a different life

Before 2018, the tax code used a category called qualified leasehold improvement property. It carried a 15-year life for improvements placed in service after October 22, 2004. That category required a lease and work placed in service more than three years after the building.

The Tax Cuts and Jobs Act replaced that category with QIP for property placed in service after 2017. A drafting error omitted QIP from the 15-year class, so it defaulted to 39 years. The CARES Act, enacted in March 2020, fixed the error retroactively to January 1, 2018, according to the Congressional Research Service.

QIP does not require a lease. An owner-occupant can also make QIP if the other tests are met. If you used 39 years for QIP placed in service in 2018, 2019, or early 2020, ask your advisor whether a correction is available.

What happens to undepreciated basis when the lease ends?

The lease term does not shorten the depreciation life. Treasury Regulation §1.167(a)-4 requires recovery without regard to the period of the lease.

A five-year lease does not turn 15-year QIP into five-year property. If an improvement is disposed of or abandoned when the lease ends, the remaining basis may be deductible. Treasury Regulation §1.168(i)-8 treats a physical abandonment loss as the adjusted depreciable basis. It applies to both lessors and lessees.

For more on writing off replaced components, see our guide to partial asset dispositions.

When does a leasehold improvement qualify as QIP?

A leasehold improvement qualifies as QIP only if it meets the statutory definition and avoids three excluded costs. The definition appears in IRC §168(e)(6), linked above.

QIP is an improvement you make to the interior of a nonresidential building after the building was first placed in service. Under Treasury Regulation §1.168(b)-1(a)(5), QIP is Section 1250 property, and the improvement must be made by the taxpayer. The current definition applies to improvements placed in service after 2017.

Use this checklist before treating a build-out as QIP:

1. Confirm the building type. The building must be nonresidential real property. Improvements to a residential rental building do not qualify as QIP.
2. Identify the interior work. Exterior work does not satisfy the interior requirement.
3. Check both service dates. The improvement must enter service after the building was first placed in service by any person.
4. Confirm who made the improvement. Buying an existing building does not make the seller's interior improvements your QIP.
5. Remove excluded costs. Exclude enlargements, elevators and escalators, and the internal structural framework.

For component-level detail, see our qualified improvement property guide.

Does failing the QIP test mean the entire project is ineligible?

No. A project can contain separately classified personal property that qualifies for bonus depreciation even when other costs fail the QIP test. Classify the assets separately rather than applying one label to the entire invoice.

When can you claim 100% bonus depreciation on leasehold improvements?

Eligible improvements can receive 100% bonus depreciation when they meet the post-January 19, 2025, acquisition and placed-in-service requirements. The One Big Beautiful Bill Act (OBBBA), enacted July 4, 2025, restored the 100% rate and made it permanent for qualifying property.

Notice 2026-11, §§2–4, explains the rate, acquisition rules, and elections summarized in this section. "Permanent" means the current law has no scheduled phase-down for this qualifying property. It does not make every renovation eligible.

Acquisition and construction timing

For purchased property, written binding contracts can determine the acquisition date. Review when the contract became binding, including enforceability, cancellation periods, and contingencies. Do not assume payment or delivery establishes the date.

Self-constructed property generally meets the acquisition-date test when physical work of a significant nature begins after January 19, 2025. The safe harbor uses more than 10% of total cost paid by cash-method taxpayers or incurred by accrual-method taxpayers. The calculation excludes land and preliminary activities.

The service date alone does not establish eligibility for the restored rate. Qualifying property acquired after September 27, 2017, but before January 20, 2025, generally receives 40% bonus when placed in service in 2025. Special property categories and elections can differ.

Timing example: the same $200,000 of QIP

Assume qualifying QIP, a 37% federal marginal rate, no state tax, and fully usable deductions. These are hypothetical calculations, not projected results.

• 100% bonus: $200,000 × 100% = $200,000 bonus deduction. At 37%, that deduction produces $74,000 of federal tax savings.
• 40% bonus: $200,000 × 40% = $80,000 bonus deduction. At 37%, the bonus portion produces $29,600 of federal tax savings.
• No bonus: $200,000 × 3.33% (15-year straight line, half-year convention) = about $6,667 of first-year depreciation. At 37%, that is about $2,467 of federal tax savings.

The 40% scenario also allows regular depreciation on the remaining basis. The 40% figures compare only the bonus portion, not total first-year depreciation. The no-bonus figure assumes the half-year convention applies, not the mid-quarter convention.

Can you choose not to take bonus depreciation?

Yes. You can elect out of bonus depreciation for a class of property placed in service during the tax year. Review that election before filing.

Separately, Notice 2026-11 describes a component election for eligible components of certain larger self-constructed projects. Ask your advisor whether it applies.

Is Section 179 an alternative for QIP?

Sometimes. IRS Publication 946 lists QIP as qualified real property that you can elect to treat as Section 179 property. Under IRC §179(b), the limit is $2.5 million, with a $4 million phase-out threshold, indexed for inflation after 2025.

Section 179 has a business-income limit and a leased-property restriction. Noncorporate landlords generally cannot claim Section 179 for property they lease to others. Tenants and owner-occupants are more likely to benefit.

For broader planning, see bonus depreciation for real estate investors.

Are leasehold improvements Section 1245 or 1250 property?

QIP is Section 1250 property, while separately identified personal property can fall under Section 1245. QIP status and personal-property classification are different questions.

A contractor's "tenant improvement" invoice can combine interior building work, equipment, and excluded structural costs. Do not classify every dollar as 15-year QIP or as shorter-lived personal property.

A cost segregation study separates costs into their appropriate asset categories and recovery periods. The IRS Cost Segregation Audit Techniques Guide discusses Section 1245 and Section 1250 classifications. Component function and installation both matter.

The guide contains asset-classification examples, not a blanket rule for every renovation. Confirm how the actual asset functions and whether it serves the building or particular business equipment.

A study documents classification. It does not create QIP eligibility or automatically make an excluded building component bonus-eligible.

Purchase plus build-out: a step-by-step example

Assume an investor buys an existing office property in 2026, then completes new qualifying interior improvements. These amounts are illustrative allocations, not R.E. Cost Seg averages.

Assume all bonus-eligible assets satisfy every applicable requirement, including acquisition and service dates. For purchased components, assume the used-property acquisition requirements are met. Also assume 100% business use, no ADS requirement, no election out, and fully usable deductions. The federal marginal rate is 37%, with no state tax included.

1. Purchase price: $2,000,000.
2. Assumed land allocation: $300,000, or 15% of the purchase price. Land is not depreciable.
3. Depreciable acquired-property basis: $2,000,000 − $300,000 = $1,700,000.
4. Assumed qualifying shorter-lived components: $250,000 of the acquired basis, identified separately through cost segregation.
5. Remaining acquired building basis: $1,700,000 − $250,000 = $1,450,000. This amount is not included in the bonus calculation.
6. Separate new QIP build-out: $300,000. This is additional expenditure, not part of the purchase price.
7. First-year bonus deduction: $250,000 + $300,000 = $550,000.
8. Federal tax savings from that deduction: $550,000 × 37% = $203,500.

The calculation does not include regular depreciation on the remaining building basis. It also does not treat the acquired building's existing interior as newly made QIP.

For a retail-specific application, see retail tenant improvements.

Can the landlord or tenant claim the deduction?

Either a landlord or tenant can depreciate qualifying improvements, depending on the facts and their depreciable investment. Confirm tax ownership and basis before either party claims the deduction.

Publication 946 states, "You can depreciate permanent improvements you make to business property you rent from someone else." Owning the underlying building is not a prerequisite for every improvement deduction. For more on build-out costs, see our guide to tenant improvements.

An allowance, reimbursement, or ownership clause deserves separate review. Give your advisor the lease, amendments, construction agreement, invoices, and payment records.

The detailed ownership and allowance discussion belongs in our guide to who has the right to depreciate tenant improvements.

Before filing, ask your advisor to confirm:

• Which party has depreciable basis in each improvement.
• How allowances and reimbursements affect that basis.
• Whether the work satisfies the QIP or separate asset-classification rules.
• Which acquisition and service dates govern the deduction.

Do not claim the same cost twice or rely on a contractor's invoice heading as proof of ownership. Resolve conflicting ownership positions before filing.

What can limit the tax benefit or increase tax later?

ADS requirements, elections, loss limitations, and depreciation recapture can change the value of an otherwise eligible deduction. Eligibility does not guarantee an immediate cash-tax saving.

Required ADS treatment

Under IRC §168(g)(8), QIP held by an electing real property trade or business under §163(j)(7)(B) must use ADS. Section 168(k)(2)(D) excludes required ADS property from bonus depreciation. For QIP, ADS uses a 20-year recovery period, rather than the 15-year GDS period.

Review your interest-limitation election before assuming the full bonus deduction applies.

Passive activity and other loss limits

Rental real estate losses are generally passive. Qualifying as a real estate professional is not enough by itself. You must also materially participate in the relevant rental activity for nonpassive treatment.

IRS Publication 925 explains those rules and other exceptions. Basis, at-risk, and excess-business-loss limitations may also affect the current deduction. Have your advisor model the amount you can actually use.

Check the state return separately before treating the federal deduction as a state deduction. The examples above exclude state taxes.

Depreciation recapture

Bonus depreciation on QIP can create ordinary-income recapture when you sell at a gain. QIP's straight-line recovery method does not prevent this result.

IRS Publication 544 explains that Section 1250 gain is ordinary income to the extent of additional depreciation. Additional depreciation generally includes depreciation exceeding straight-line amounts for property held longer than one year.

For separately classified Section 1245 property, gain is generally ordinary income up to depreciation allowed or allowable, including bonus depreciation. Recapture cannot exceed the gain subject to these rules.

Do not assume all QIP-related gain receives a maximum 25% rate. Unrecaptured Section 1250 gain is distinct from ordinary-income recapture and excludes gain already taxed as ordinary income. See our depreciation recapture guide for the broader framework.

Frequently asked questions

What is the depreciation life of leasehold improvements?

Leasehold improvements that qualify as QIP have a 15-year GDS life and a 20-year ADS life. Interior improvements to a nonresidential building that fail the QIP test generally use 39 years.

Is QIP depreciated over 15 or 39 years?

QIP placed in service after 2017 is depreciated over 15 years using the straight-line method. The CARES Act fixed the original drafting error retroactively to January 1, 2018.

Can I depreciate leasehold improvements over the lease term?

No. Improvements on leased property are recovered over their tax recovery period, without regard to the lease term. If an improvement is abandoned when the lease ends, the remaining basis may be deductible.

Do leasehold improvements qualify for 100% bonus depreciation?

Leasehold improvements that qualify as QIP can receive 100% bonus depreciation if acquired and placed in service after January 19, 2025. Property required to use ADS is not eligible, and you can elect out by class.

Is qualified leasehold improvement property the same as QIP?

No. Qualified leasehold improvement property was the pre-2018 category and required a lease. QIP replaced it for property placed in service after 2017 and does not require a lease.

A practical next step

Separate the project costs, confirm timing, and identify the taxpayer entitled to each deduction. Then model current-year usability and future recapture before choosing the treatment.

Book a meeting with R.E. Cost Seg to discuss the project and whether a cost segregation study fits your situation.

Confirm your specific facts, elections, and filing treatment with your tax advisor.