Cost Segregation · Brief · Working level
Qualified improvement property: the 15-year life for interior build-outs
QIP — most interior improvements to nonresidential buildings placed in service after the building — is 15-year, bonus-eligible property after the CARES Act fixed the TCJA's drafting error. Definition, exclusions, and how it fits alongside a cost segregation study.
Qualified improvement property is the tax law's concession that a tenant build-out is not a building. Under Section 168(e)(6), QIP — any improvement made by the taxpayer to the interior of a nonresidential building, placed in service after the building itself — gets a 15-year straight-line recovery period instead of 39 years. And because 15 is inside Section 168(k)'s 20-year-or-less window, QIP is bonus-eligible: for QIP acquired after January 19, 2025, that means a 100 percent first-year deduction for what would otherwise be four decades of depreciation.
For renovation-heavy owners, QIP often moves more dollars than traditional cost segregation reclassification — and the two analyses are done together, not in competition.
The definition, element by element
Four requirements, three exclusions:
| Element | What it means in practice |
|---|---|
| Improvement to an interior portion | Interior work only — roofs, exterior windows, facades, and site work are out (they may be 15-year land improvements or building property instead) |
| Nonresidential real property | Office, retail, industrial, hospitality. Apartment interiors never qualify |
| Placed in service after the building | Day-one build-out of a brand-new building is not QIP; improvements to a building the taxpayer just bought (which was placed in service by someone long ago) generally can be |
| Made by the taxpayer | Post-2017 statute requires the improvement be made by the taxpayer — acquired improvements purchased with a building are not QIP to the buyer |
| Excluded: enlargements | Additions that increase the building envelope |
| Excluded: elevators and escalators | Even though interior |
| Excluded: internal structural framework | Load-bearing elements: columns, girders, framing |
Everything else interior — drywall partitions, ceilings, interior doors, general lighting, general HVAC distribution and mechanical serving the interior, fire protection, plumbing — is fair game. Notice how much of that list is exactly the 39-year structural-component material a cost segregation study cannot reclassify: QIP reaches costs the Section 1245 case law never could.
The glitch and the fix
The TCJA consolidated the old qualified leasehold, restaurant, and retail improvement categories into QIP and, per the conference report, meant to assign a 15-year life. The statutory text omitted it. From 2018 until March 2020, QIP was 39-year property and — being over 20 years — ineligible for the TCJA's 100 percent bonus: the "retail glitch." The CARES Act amended Section 168(e)(6) retroactively for property placed in service after December 31, 2017. Owners who had filed 2018–2019 returns at 39 years caught up by amended return or by an automatic method change under Form 3115, per Rev. Proc. 2020-25; any remaining stragglers today are squarely in look-back territory.
Bonus, ADS, and the current rates
QIP's 15-year GDS life makes it qualified property under Section 168(k). The rate follows the acquisition date: 100 percent, permanently, for QIP acquired after January 19, 2025; the 80/60/40 phase-down for earlier acquisitions — the same seam discussed in cost segregation and bonus depreciation.
The significant exception: a real property trade or business that elected out of the Section 163(j) interest limitation must depreciate QIP under ADS — a 20-year life, straight line, and no bonus. For leveraged owners, the interest-versus-depreciation trade should be modeled before the election, not discovered after the build-out.
Where QIP meets cost segregation
On a renovation, the study's job is triage across three buckets: true Section 1245 personal property to 5- and 7-year lives (best — 100 percent bonus and better recapture sizing per component); QIP to 15-year bonus-eligible treatment (nearly as good in year one); and the excluded remainder to 39 years. The same engagement should flag repair-versus-capitalization opportunities under the tangible property regulations and any partial disposition elections for the components the renovation tore out — the deadline for those is the renovation year's return, and it does not reopen.
Frequently asked questions
- What is qualified improvement property?
- QIP 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 — excluding building enlargements, elevators and escalators, and internal structural framework. Under Section 168(e)(6) it has a 15-year recovery period, straight-line, and qualifies for bonus depreciation.
- What was the QIP glitch and how was it fixed?
- The TCJA intended QIP to be 15-year property but omitted it from the statute, leaving it at 39 years and bonus-ineligible — the 'retail glitch.' The CARES Act fixed it retroactively for property placed in service after 2017. Taxpayers who had depreciated 2018–2019 QIP over 39 years could catch up by amended return or a Form 3115 method change.
- Is QIP eligible for 100 percent bonus depreciation?
- Yes. As 15-year property, QIP is within Section 168(k)'s 20-year-or-less window. QIP acquired after January 19, 2025 qualifies for the permanently restored 100 percent bonus; earlier acquisitions follow the phase-down (80 percent for 2023, 60 percent for 2024, 40 percent for early-2025). An electing real property trade or business must use ADS — a 20-year life with no bonus.
- Does QIP apply to residential rental property?
- No. QIP is defined only for improvements to nonresidential real property. Interior renovations of apartment buildings are depreciated over 27.5 years unless a cost segregation analysis reclassifies specific components as 5- or 7-year personal property.