A 2020 legislative correction restored first-year tax savings that commercial real estate investors had lost for two years. If you own commercial property and have made interior improvements, this fix and the permanent 100% bonus depreciation that followed in 2025 directly affect your bottom line.
Qualified improvement property (QIP) qualifies for a 15-year recovery period, and QIP that is acquired and placed in service after January 19, 2025, is eligible for 100% bonus depreciation. That means you can deduct the full cost of qualifying interior improvements in Year 1 instead of spreading deductions over 39 years.
This article explains what QIP is, how the tax law changed, and how you can claim these benefits. You'll see the dollar impact through worked examples and the conditions that determine whether they apply to you.
What Exactly Is Qualified Improvement Property?
Qualified improvement property is any improvement made by the taxpayer to the interior portion of a nonresidential building, placed in service after the building was first placed in service. The definition is set in Internal Revenue Code §168(e)(6), and it is narrower than many investors assume.
What qualifies as QIP:
- Interior walls and non-structural partition systems
- Ceilings and ceiling systems
- Interior flooring
- Interior lighting and electrical systems (non-structural)
- Drywall, interior doors, and finishes
What does NOT qualify (statutory exclusions):
- Building enlargements or expansions
- Elevators and escalators
- Internal structural framework
Under §168(e)(6), QIP specifically excludes expenditures attributable to enlargement of the building, elevators or escalators, and the internal structural framework. The key distinction: QIP covers improvements to the interior space, not changes to the building's structure or footprint.
A common point of confusion: HVAC, fire protection, and security systems. Roofs, exterior HVAC units, fire protection, and security systems are not QIP. A roof or rooftop unit isn’t an improvement to an interior portion of the building. They can still be expensed under Section 179 as qualified real property, subject to dollar and taxable-income limits. Note that QIP is also Section 179-eligible, so for QIP the real choice is between bonus depreciation and Section 179.
Does QIP apply to residential rental properties like apartments?
No. QIP applies to nonresidential (commercial) property only. Residential rental property is excluded: the building itself is depreciated over 27.5 years, and improvements to residential rentals follow separate rules rather than the 15-year QIP classification.
The TCJA Drafting Error That Delayed the Benefit
In December 2017, Congress passed the Tax Cuts and Jobs Act (TCJA). The intent was to assign QIP a 15-year recovery period, making it eligible for bonus depreciation.
But the statutory text did not add QIP to the list of 15-year property. As a result, QIP defaulted to a 39-year recovery period and was ineligible for bonus depreciation, an error widely known as the "retail glitch." For improvements placed in service in 2018 and 2019, investors were stuck with slower depreciation.
Example: $500,000 interior renovation under the TCJA error
- 39-year straight-line depreciation: about $12,820 per year
- First-year deduction: roughly $12,820 (somewhat lower in practice, because 39-year real property uses the IRS mid-month convention in Year 1)
- First-year tax savings at a 37% rate: about $4,743
With 15-year classification and 100% bonus:
- First-year deduction: $500,000
- First-year tax savings at 37%: $185,000
At these assumptions, the Year 1 difference is roughly $180,000, cash flow deferred by nearly four decades under the error. (Bonus depreciation does not change the total deduction over time; it accelerates it, which is valuable because of the time value of money.)
The CARES Act Fix: What Changed in 2020
In March 2020, Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which included the technical correction investors had been waiting for.
The CARES Act designated QIP as 15-year property, retroactive to January 1, 2018. Investors who made qualifying improvements in 2018 or 2019 could go back and claim the accelerated depreciation they had missed.
The retroactive fix created a one-time catch-up opportunity. If you depreciated QIP over 39 years, the fix today is a Form 3115 accounting-method change, which captures the full catch-up in the current year through a Section 481(a) adjustment. (Rev. Proc. 2020-25 also allowed amended returns, but that window closed in 2021.)
The One Big Beautiful Bill Act (OBBBA), enacted July 4, 2025, then made 100% bonus depreciation permanent. Per IRS guidance, the permanent 100% deduction applies to qualified property acquired and placed in service after January 19, 2025. Because QIP has a 15-year recovery period, it falls within the property that can qualify.
QIP Depreciation in Action: Worked Examples
The following examples assume a 37% marginal rate and that the improvements meet all bonus-depreciation requirements (see "Conditions and limitations" below). Your actual rate and eligibility will vary.
Example 1: Retail strip center renovation
An investor completes $300,000 in qualifying interior improvements: new flooring, interior lighting, and non-structural partition walls.
- Qualifying QIP: $300,000
- With 100% bonus depreciation: $300,000 deduction in Year 1
- Tax savings at 37%: $111,000
Compared with 39-year straight-line depreciation:
- Annual deduction: about $7,692 (lower in Year 1 under the mid-month convention)
- First-year tax savings: about $2,846
The Year 1 difference is roughly $108,000 in additional cash.
Example 2: Office building tenant buildout
A landlord invests $150,000 in an interior buildout: partition walls, ceiling tiles, carpet, and interior electrical work.
- With 100% bonus depreciation: $150,000 deduction in Year 1
- Tax savings at 37%: $55,500
That $55,500 can be redeployed into the next acquisition, used to pay down debt, or held as reserves.
How QIP Fits Into a Cost Segregation Strategy
QIP is one piece of a larger depreciation strategy. A cost segregation study identifies accelerated depreciation opportunities throughout a property, not just QIP.
A study reclassifies building components into their correct IRS categories:
- 5-year property: carpeting, appliances, decorative fixtures
- 7-year property: office furniture, certain equipment
- 15-year property: land improvements, parking lots, landscaping, and QIP
- 27.5-year (residential) / 39-year (nonresidential) property: the building's structural components
Example: Combined cost segregation impact
An investor purchases a $2 million commercial building and invests $400,000 in QIP-eligible interior improvements.
- Purchase price: $2,000,000
- Land value allocation (15%): $300,000
- Depreciable building basis: $1,700,000
- QIP improvements: $400,000
The QIP itself is bonus-eligible whether or not you commission a full engineering study. What the cost segregation study adds is the reclassification of components inside the $1,700,000 building basis:
- Reclassified 5/7/15-year property found in the building: $350,000 → about $129,500 in incremental Year 1 tax savings at 37%
- QIP already eligible for bonus: $400,000
- Total Year 1 accelerated deductions (QIP + reclassified components): $750,000 → about $277,500 in first-year tax savings
In other words, the study's specific contribution here is the $350,000 reclassification — the QIP acceleration is available either way.
One consideration: Accelerated depreciation is recaptured on sale. For QIP, the bonus-driven excess over straight line comes back as ordinary income under Section 1250, with the straight-line portion taxed as unrecaptured Section 1250 gain at up to 25%; 5- and 7-year components are Section 1245 property, fully recaptured at ordinary rates. The time value of money can still make acceleration worthwhile, particularly for longer holds, but recapture should be modeled before you decide.
Should I do a cost seg study if I only have QIP improvements, not a full building purchase?
It depends on the dollar amount and complexity. For larger interior projects, an engineering-based study can identify additional non-QIP components and support the classifications if questioned. For smaller or clearly defined QIP projects, your CPA may be able to classify the improvements without a formal study. R.E. Cost Seg offers a free preliminary analysis so you can compare the projected benefit against the cost before committing.
Conditions and Limitations to Check First
The examples above assume every requirement is met. Several conditions can reduce, defer, or eliminate the benefit:
- Acquisition and placed-in-service timing. OBBBA's permanent 100% bonus applies to property acquired and placed in service after January 19, 2025. Property under a binding written contract entered before January 20, 2025, generally does not qualify for 100%, even if finished later; it follows the prior-law rate.
- Real property trade or business (RPTB) election. If you make the §163(j) RPTB election, QIP must be depreciated under the alternative depreciation system (20 years) and is not eligible for bonus depreciation.
- Section 163(j) interest limitation. Business interest deduction limits can interact with these decisions and change the optimal choice.
- Passive activity and at-risk rules. For many investors, losses created by accelerated depreciation are passive and may be suspended until you have passive income or dispose of the property.
- Section 179 limits. If you rely on Section 179 for items like HVAC, fire protection, or security systems, the deduction is capped by annual dollar limits and cannot create a business loss.
- State conformity. Many states do not follow federal bonus depreciation, so your state result may differ from the federal figures above.
This article is general information, not tax advice. Confirm your specific facts with a qualified tax professional.
Key Deadlines and the Bonus Depreciation Timeline
Under prior law, bonus depreciation was phasing down: 80% in 2023, 60% in 2024, and 40% for property placed in service in early 2025. OBBBA reversed that phase-down for qualifying property acquired and placed in service after January 19, 2025.
For QIP acquired and placed in service after January 19, 2025:
- 100% bonus depreciation available (now permanent)
- Full cost deductible in Year 1, if all requirements are met
For QIP placed in service before January 20, 2025:
- The prior phase-down rate applies: 60% for 2024 and 40% for property placed in service between January 1 and January 19, 2025.
Timing can matter at the margin. Consider a $200,000 renovation acquired and placed in service in early 2025:
- At the 40% phase-down rate: $80,000 first-year bonus deduction
- At 100% (acquired and placed in service after January 19, 2025): $200,000 first-year deduction
- Difference at 37%: about $44,400 in Year 1 tax savings
Because the 100% rate turns on both acquisition and placed-in-service dates, confirm your contract and completion timeline with your CPA before assuming the higher rate.
Key Takeaways
- QIP is limited to non-structural interior improvements of commercial buildings. Enlargements, elevators, escalators, and the internal structural framework are excluded. HVAC, fire protection, and security systems are Section 179 property, not QIP.
- The 2020 CARES Act corrected the TCJA drafting error. QIP has a 15-year recovery period, retroactive to January 1, 2018.
- 100% bonus depreciation is permanent under OBBBA, with a timing condition. It applies to QIP acquired and placed in service after January 19, 2025.
- Prior-year errors can be corrected. If you depreciated QIP over 39 years, you can claim missed deductions via an amended return or Form 3115 under Rev. Proc. 2020-25.
- A cost segregation study adds value beyond QIP by reclassifying other building components, but QIP itself is bonus-eligible with or without a full study.
Proper classification can generate six-figure Year 1 tax savings on a single renovation, but the outcome depends on your acquisition timing, elections, and passive-activity position. If you've made interior improvements to commercial property, it's worth confirming what's eligible.
Contact R.E. Cost Seg for a free preliminary analysis of your commercial property improvements. You'll get a clear picture of your QIP-eligible assets, other reclassification opportunities, and estimated tax savings, so you can decide with real numbers.
