Qualified Improvement Property (QIP): The 15-Year Recovery Period Most Investors Miss
Qualified Improvement Property (QIP) is any improvement to the interior of a nonresidential building placed in service after the building was first placed in service. QIP excludes enlargements, structural framework, and elevators or escalators. Under amended Section 168(k) and OBBBA, QIP has a 15-year MACRS recovery period and qualifies for 100% bonus depreciation when acquired after January 19, 2025. The category is materially undertaken by CPAs because the 39-year default is the path of least resistance on construction-improvement schedules.
Definition of QIP under IRC Section 168(e)(6)
IRC Section 168(e)(6) defines Qualified Improvement Property as any improvement made by the taxpayer to an interior portion of a building that is nonresidential real property, if the improvement is placed in service after the date the building was first placed in service. The statutory definition has three negative carve-outs that limit QIP scope: enlargements of the building, any elevator or escalator, and the internal structural framework.
The placed-in-service test is the core gating question. Improvements made in the same tax year that the building was first placed in service do not qualify as QIP; they are treated as part of the original building's 39-year basis. This matters for new construction where a tenant moves in during the same year the building shell completes. Wait at least one tax year if QIP treatment matters and the cost-benefit favors it.
Section 168(e)(6) was originally enacted in the Tax Cuts and Jobs Act of 2017 but a drafting error left QIP at 39 years. The CARES Act in 2020 retroactively corrected the error and set QIP at 15 years. OBBBA in 2025 preserved the 15-year period and restored 100% bonus depreciation for QIP acquired after January 19, 2025.
What qualifies and what does not
Qualifying examples include new interior partition walls (non-load-bearing), drop ceilings, electrical updates to interior systems, lighting upgrades, new flooring, plumbing modifications inside the existing footprint, fire suppression upgrades, security system installations, and tenant-build-out elements that are interior and structural-framework-independent.
Non-qualifying examples include any enlargement (added square footage, new wings, expanded floor plates), elevators and escalators (excluded explicitly by statute regardless of how interior the installation feels), the building's internal structural framework (load-bearing walls, foundational columns, structural steel), exterior improvements (roof, exterior walls, parking areas, landscaping), and any improvement to residential rental property (Section 168(e)(6) applies only to nonresidential).
The residential exclusion is significant. A 27.5-year residential rental does not have QIP at all. Improvements to residential rentals depreciate over 27.5 years under the regular MACRS rules, with cost-segregation reclassification available for the personal property and 15-year land improvement components but no separate QIP category.
| Improvement | Qualifies as QIP? |
|---|---|
| Interior partition walls (non-load-bearing) | Yes |
| Drop ceilings | Yes |
| Electrical updates to interior systems | Yes |
| Lighting upgrades (interior) | Yes |
| Flooring replacement (interior) | Yes |
| Plumbing modifications inside the existing footprint | Yes |
| Fire suppression upgrades (interior) | Yes |
| Tenant build-out (interior) | Generally yes |
| Elevator or escalator | No (explicit statutory exclusion) |
| Building enlargement / addition | No |
| Load-bearing walls / structural framework | No |
| Roof replacement | No (exterior) |
| Improvements to residential rental property | No (Section 168(e)(6) is nonresidential only) |
| Improvements in same tax year as original building placed in service | No (placed-in-service timing rule) |
Why QIP commonly gets missed
Three reasons. First, the default depreciation entry on a typical fixed-asset addition is 39 years. CPAs working from a project-cost schedule without the IRS Pub 5653 framework in mind file the additions on the long schedule. Nobody catches the missed QIP classification because no one is looking for it.
Second, the placed-in-service test requires confirming the original building's placed-in-service date. For a 2022-acquired office building with 2024 tenant improvements, the 2024 improvements are QIP. The original 2022 cost is not. A CPA working only from the 2024 invoices may not have the 2022 placed-in-service date easily at hand, and the classification gets defaulted to 39 years.
Third, even where the CPA knows about QIP conceptually, the form-by-form correction is mechanical work that has no fee billing code. The catch-up requires a Form 3115 with DCN 7. CPAs who are not engineering-trained often hand off to a cost segregation engineer rather than do the classification work themselves.
QIP under OBBBA: 100% bonus restored
Public Law 119-21 (OBBBA), signed July 4, 2025, restored permanent 100% bonus depreciation under amended Section 168(k) for property acquired and placed in service after January 19, 2025. QIP is bonus-eligible under Section 168(k)(2)(A) because it is property with a recovery period of 20 years or less.
The combined effect: QIP placed in service after January 19, 2025 deducts entirely in the first year as 100% bonus depreciation. A $500K tenant-build-out qualifying as QIP yields a $500K first-year deduction. At a 32% marginal rate, that is $160K of first-year tax savings on a single tenant improvement project.
Pre-OBBBA QIP placed in service before January 20, 2025 stays on the legacy phase-down: 40% bonus in 2025, 20% in 2026, 0% thereafter. The phase-down still applies to property under binding contract before January 20, 2025 regardless of when placed in service.
QIP within a cost segregation study
Cost segregation studies on nonresidential property typically include a QIP analysis whenever there have been post-acquisition improvements. The engineer identifies which improvements qualify as QIP, allocates their cost, and applies the 15-year recovery period with 100% bonus where eligible.
For look-back studies, QIP classifications are corrected via the same Form 3115 with DCN 7 mechanism described in the form-3115 guide. The Section 481(a) catch-up captures the additional depreciation that would have been taken if QIP had been classified correctly from inception.
Worked example: $5M office building, $500K tenant build-out in 2026
Investor acquires a $5M office building on March 15, 2023. Land value $1M, depreciable basis $4M, depreciating on the 39-year nonresidential schedule. In 2026, the investor signs a tenant lease and completes a $500K interior build-out (new partition walls, lighting, drop ceiling, flooring, plumbing modifications), placing the build-out in service November 1, 2026.
Because the $500K build-out is interior improvements to nonresidential property placed in service after the building was first placed in service, it qualifies as QIP under Section 168(e)(6). The build-out was acquired after January 19, 2025, so OBBBA's permanent 100% bonus depreciation applies under amended Section 168(k).
First-year deduction on the build-out: $500K (100% bonus). At a 37% combined federal and state marginal rate, the first-year tax savings are $185K against the rental income from this and other passive activities. Without QIP classification, the $500K would have been depreciated over 39 years (roughly $13K per year), and the first-year tax savings would have been about $5K. The QIP classification delivers $180K of additional first-year tax savings on a single project.
Catching up missed QIP via Form 3115
If your CPA classified prior-year tenant improvements or interior renovations as 39-year property when they should have been QIP, the correction is a Form 3115 with DCN 7. The form computes a Section 481(a) catch-up adjustment that captures the missed accelerated depreciation in a single current-year deduction.
The catch-up size depends on (a) the amount misclassified, (b) the placed-in-service date of the misclassified improvements, and (c) the bonus depreciation rate that applied to QIP at the placed-in-service date. Items placed in service between September 28, 2017 and the end of 2022 qualified for 100% bonus under original TCJA rules. Items placed in service from 2023 onward are subject to the OBBBA phase-down regime or the post-OBBBA permanent 100%.
WeCostSeg's look-back service identifies missed QIP as part of the engagement and includes Form 3115 preparation at no extra cost. The deliverable includes the QIP allocation, the Section 481(a) computation showing the catch-up amount, and the prepared Form 3115 ready to attach to the current-year return.
Frequently asked questions
- Does QIP apply to residential rentals?
- No. Section 168(e)(6) limits QIP to nonresidential real property. Improvements to residential rentals depreciate on the 27.5-year schedule, with cost-segregation reclassification available for personal property and 15-year land improvement components but no separate QIP category.
- Did the CARES Act fix the QIP recovery period?
- Yes. The CARES Act (March 2020) retroactively fixed the TCJA drafting error that had left QIP at 39 years instead of the intended 15. After the fix, QIP is 15-year property and is eligible for bonus depreciation. OBBBA preserved the 15-year period and restored 100% bonus for post-Jan-19-2025 acquisitions.
- What is the bonus depreciation rate for QIP placed in service in 2026?
- Under OBBBA, 100% bonus depreciation applies to QIP acquired and placed in service after January 19, 2025. QIP under a binding contract entered before January 20, 2025 stays on the phase-down: 20% in 2026, 0% in 2027 and after.
- Does the same-year placed-in-service rule mean I cannot do QIP on new construction in year one?
- Correct. Improvements placed in service in the same year the original building was first placed in service do not qualify as QIP. They are treated as part of the original building's 39-year basis. If you can defer the tenant-improvement placed-in-service date to a subsequent tax year, QIP treatment becomes available.
- Do elevators qualify as QIP?
- No. Section 168(e)(6) explicitly excludes elevators and escalators from QIP regardless of how interior the installation is. Elevators depreciate on the 39-year nonresidential schedule.
- What about partial QIP within a larger project?
- The QIP and non-QIP components of a single project should be cost-allocated and depreciated separately. The engineer reviews construction-cost detail, blueprints, and scope of work to allocate cost between the QIP eligible portion and the non-QIP portion (enlargement, structural, exterior, elevator).
- Can I claim Section 179 expensing on QIP instead of bonus depreciation?
- Yes. Section 179 was extended by TCJA to include QIP as well as roofs, HVAC, fire protection, alarms, and security systems for nonresidential property. OBBBA raised the Section 179 cap to $2.5M with a $4M phaseout. Section 179 is elected, and bonus is automatic unless opted out.
- Does QIP apply to leasehold improvements paid for by the tenant?
- QIP analysis follows the party that owns the improvement for depreciation purposes. If the tenant pays for and owns the improvement, the tenant claims the QIP deduction. If the landlord pays for and owns the improvement, the landlord claims it. Negotiated tenant-improvement allowances can shift ownership. Check the lease language.
- What records do I need to support QIP classification?
- Building permits showing placed-in-service date of the original building, construction invoices for the improvements, blueprints or scope of work showing the interior nature of the improvements, and a fixed-asset schedule showing the property as separately tracked. A cost segregation report formalizes these into a defensible audit trail.
- Can I look back several years to capture missed QIP?
- Yes. A Form 3115 with DCN 7 captures the Section 481(a) catch-up in the current year. No amended returns required. There is no statutory deadline as long as the property is still owned. The earlier you correct, the larger the catch-up.
Zawwad Ul Sami, Founder
Zawwad Ul Sami is the founder of WeCostSeg, a founder-led cost segregation firm serving real estate investors across the US. He focuses on strategy, pricing, and the firm's overall direction.