Qualified Improvement Property (QIP): How to Maximize Deductions from Tenant Improvements
Introduction
Tenant improvements aren’t just a construction project, they’re a tax event.
And if you’re treating the full cost of your buildout as 39-year property, you’re likely missing out on tens of thousands of dollars in accelerated deductions.
That’s where Qualified Improvement Property (QIP) comes in. It’s one of the most underutilized tax classifications in real estate and a big reason cost segregation studies deliver so much value after a renovation.
Let’s break down how it works, when it applies, and how to make sure your improvements are properly classified.
And if you’re treating the full cost of your buildout as 39-year property, you’re likely missing out on tens of thousands of dollars in accelerated deductions.
That’s where Qualified Improvement Property (QIP) comes in. It’s one of the most underutilized tax classifications in real estate and a big reason cost segregation studies deliver so much value after a renovation.
Let’s break down how it works, when it applies, and how to make sure your improvements are properly classified.
What Is Qualified Improvement Property?
Qualified Improvement Property (QIP) is a specific category of real estate asset defined by the IRS. It covers non-structural interior improvements made to commercial (nonresidential) property after the building has been placed in service.
To qualify as QIP, an improvement must:
To qualify as QIP, an improvement must:
- Be made to the interior of the building
- Not be part of the structural framework
- Not enlarge the building
- Not involve elevators or escalators
If it checks those boxes, it’s QIP and that means it gets a 15-year depreciation life and may qualify for bonus depreciation (60% in 2025, with a possible return to 100%).
This is a huge opportunity for investors doing tenant improvements, buildouts, or commercial renovations.
This is a huge opportunity for investors doing tenant improvements, buildouts, or commercial renovations.
Common Examples of QIP
Think of QIP as the interior upgrades you make after a tenant signs a lease or you acquire a new commercial building. Some of the most common QIP assets include:
- Interior lighting and electrical systems
- Flooring (carpet, tile, vinyl)
- Millwork and cabinetry
- Drop ceilings
- Non-load-bearing interior walls
- Interior signage and finishes
If the improvement is inside the building, non-structural, and not expanding the space then it likely qualifies.
What Doesn’t Qualify?
Not every improvement falls under QIP. It’s just as important to understand what doesn’t count:
- Exterior work (parking lots, landscaping, signage)
- Structural framework (load-bearing walls, roof systems)
- Additions that increase the square footage of the building
- Elevators or escalators
- HVAC systems that serve the whole building (unless specifically non-structural and fully interior)
When in doubt, a cost segregation study can help identify and break out qualifying versus non-qualifying assets.
The Anatomy of a Tenant Improvement
A visual comparison of a $200,000 renovation project with and without a cost segregation study.
Default Treatment
Without a study, the entire cost is typically classified as 39-Year Property.
39-Year Structural Property
$200,000
Year-One Depreciation
$5,128
With Cost Segregation
An engineering-based study identifies and reclassifies assets into shorter-lived categories.
5-Year Property
$90,000
Year-1 Deduction
$43,200
15-Year QIP
$40,000
Year-1 Deduction
$16,800
39-Year Structural
$70,000
Year-1 Deduction
$1,795
Total Year-One Depreciation (at 40% Bonus)
$61,795
Why QIP Matters for Tax Planning
Here’s the big reason investors should care about QIP: Bonus depreciation.
Under current law, 15-year property like QIP is eligible for bonus depreciation, which allows you to write off a large portion (or all) of the cost in year one.
That means more deductions, lower taxable income, and better after-tax cash flow.
Even if bonus depreciation eventually phases out completely, reclassifying QIP to 15-year MACRS still delivers significantly faster depreciation than 39-year treatment.
Under current law, 15-year property like QIP is eligible for bonus depreciation, which allows you to write off a large portion (or all) of the cost in year one.
That means more deductions, lower taxable income, and better after-tax cash flow.
Even if bonus depreciation eventually phases out completely, reclassifying QIP to 15-year MACRS still delivers significantly faster depreciation than 39-year treatment.
Real-World Example
Let’s say you complete a $200,000 tenant improvement project in a commercial retail space. The contractor sends you a summary invoice that just says: “Buildout – Suite 100.”
If your CPA books it all as 39-year property, you’ll get around $5,100 in year-one depreciation.
But if you break it down:
If your CPA books it all as 39-year property, you’ll get around $5,100 in year-one depreciation.
But if you break it down:
- $90,000 of 5-year assets (flooring, lighting, kitchen fixtures)
- $40,000 of QIP (interior finishes and millwork)
- $70,000 of structural 39-year property
Now you’re looking at $130,000 in year-one deductions (assuming bonus depreciation applies). That’s the power of proper classification.
How to Ensure You Don’t Miss QIP
- 1. Itemize Early:Ask your contractors for detailed, line-item invoices. Don’t accept lump sums. The more detail you have, the more accurately your CPA or cost seg provider can classify assets.
- 2. Coordinate with Advisors:Make sure your CPA and cost segregation firm are looped in before or during the improvement process—not months later when it’s too late to reclassify.
- 3. Watch for Bonus Opportunities:If Congress passes new legislation restoring 100% bonus depreciation (as proposed), any QIP placed in service in 2023, 2024, or 2025 might be eligible for full write-off. That’s a potential windfall if timed right.
- 4. Consider a Study After Big Buildouts:If your improvements exceed $100K (or if you recently acquired, renovated, or refinanced a property) it’s probably worth running a cost seg study.
Final Thoughts: QIP Is the Hidden Gem in Commercial Real Estate Tax Strategy
Don’t let the IRS decide your depreciation schedule by default.
Qualified Improvement Property is one of the best tools in the tax code for front-loading deductions after a commercial buildout. But if you don’t know it’s there or don’t document properly, then you’ll miss it.
If you’ve recently completed a tenant improvement project (or have one coming up), let’s take a look. We’ll review your invoices, flag QIP opportunities, and help you capture the deductions you’re entitled to.
Qualified Improvement Property is one of the best tools in the tax code for front-loading deductions after a commercial buildout. But if you don’t know it’s there or don’t document properly, then you’ll miss it.
If you’ve recently completed a tenant improvement project (or have one coming up), let’s take a look. We’ll review your invoices, flag QIP opportunities, and help you capture the deductions you’re entitled to.
About the Author
Sean Graham, CPA specializes in cost segregation, tax depreciation, and real estate tax savings. As the Chief Technical CPA at Maven Cost Segregation: Tax Advisors, he has overseen 1000+ cost segregation studies, helping investors maximize deductions.