What Is Qualified Improvement Property (QIP)?

Qualified improvement property (QIP) is any improvement to the interior of a nonresidential building placed in service after the building itself, excluding enlargements, elevators and escalators, and the internal structural framework. QIP is 15-year MACRS property, which makes it eligible for 100 percent bonus depreciation and section 179 instead of the building's 39-year life.

On this page

1. Why does QIP matter?
2. What counts as QIP?
3. Who can claim it — tenant or landlord?
4. What is the ADS trap?
5. Worked example
6. Frequently asked questions
7. Related guides
8. Official sources
9. Next step

Why does QIP matter?

Without the QIP category, most improvements to a commercial building would be depreciated over 39 years like the building. QIP pulls interior improvements into the 15-year class, and because 15-year property qualifies for bonus depreciation, a tenant build-out or a store renovation that meets the definition can be written off in the year it is completed. For a business improving leased or owned commercial space, QIP is the difference between deducting US$300,000 this year and deducting US$7,700 a year for thirty-nine years.

The category replaced three narrower ones — qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property — in 2018. Anyone searching for "qualified leasehold improvement property" is looking at the old rule; QIP is its successor and is broader (no lease required, no three-year building age requirement).

What counts as QIP?

The rooftop HVAC unit itself is a common boundary case: it sits outside the building envelope and is generally not QIP, but it is separately eligible for section 179 as a specified improvement (roofs, HVAC, fire protection, alarm and security systems are section 179-eligible improvements to nonresidential property even when they are not QIP). So a full HVAC replacement may be section 179 property without being bonus-eligible QIP. Residential rental buildings are excluded entirely — improvements to an apartment building are 27.5-year property (or reclassified by cost segregation).

Who can claim it — tenant or landlord?

Whoever pays for and owns the improvement depreciates it. A tenant who pays for its own build-out depreciates it as QIP over 15 years (or expenses it under bonus or section 179) even though the lease may be shorter — and when the tenant leaves, any remaining basis is written off as a loss in that year. A landlord who funds a tenant's improvements owns and depreciates them. A construction allowance paid by the landlord to the tenant follows the section 110 rules for short-term retail leases — the tenant excludes the allowance and the landlord treats the improvements as its own property — or is otherwise generally income to the tenant, who owns and depreciates the improvements; the lease terms decide.

What is the ADS trap?

A real property trade or business that elects out of the business interest limitation must depreciate its QIP under the Alternative Depreciation System — 20 years, straight line, and no bonus depreciation (property required to use ADS is excluded from bonus). Landlords weighing the interest-limitation election weigh it against the QIP they plan to build (the ADS guide).

Worked example

A restaurant group leases a 4,000-square-foot shell in a retail center and spends US$520,000 on the build-out: US$380,000 of interior walls, finishes, lighting, plumbing fixtures, and kitchen ductwork (QIP — 15-year, bonus-eligible); US$90,000 of kitchen equipment and furniture (7-year property, bonus-eligible, not QIP); US$50,000 for a new rooftop HVAC unit (not QIP, but section 179-eligible as a specified improvement). With 100 percent bonus depreciation on the QIP and equipment, and section 179 on the HVAC unit, the group deducts the full US$520,000 in the opening year — against a group profit large enough to absorb the section 179 portion. Its landlord, who elected out of the interest limitation last year, funded a similar build-out in another unit: 20-year ADS, no bonus, about US$9,500 of first-year depreciation on US$380,000 (half-year convention).

Frequently asked questions

Official sources

Publication 946 defines qualified improvement property this way: “Generally, this is any improvement to an interior part of a building that is nonresidential real property, and the improvement is section 1250 property, is made by you, and is placed in service by you after 2017 and after the date the building was first placed in service by any person.” — Internal Revenue Service, Publication 946, How To Depreciate Property, https://www.irs.gov/publications/p946

Next step

Fairlight Accounting is a cross-border accounting and tax practice with a U.S. Tax Desk and a Canadian Tax Desk. Our U.S. Tax Desk handles build-out and improvement classification, QIP and section 179 elections for tenants and landlords, and the interest-limitation election's depreciation consequences. See pricing or book a call.