QIP and Short-Term Rentals: The Overlooked Upgrade Most Hosts Miss
Introduction
People talk a lot about the “short-term rental loophole.” The opportunity is real—but it’s not as simple as buying an Airbnb and writing off everything.
If you’re going to renovate an STR, you should know when those dollars can be treated as Qualified Improvement Property (QIP). Most investors don’t, and that means they either leave money on the table or misclassify improvements.
If you’re going to renovate an STR, you should know when those dollars can be treated as Qualified Improvement Property (QIP). Most investors don’t, and that means they either leave money on the table or misclassify improvements.
Making Sense of the STR Rule
Normally, rental real estate is passive. Losses from passive activities can’t offset your W-2 or other active income.
Short-term rentals are different. If your average guest stay is 7 days or less, the property isn’t treated as a “rental activity.” Instead, it’s treated like a business.
That means if you materially participate for example, 500 hours in a year or 100 hours more than anyone else the losses are non-passive. And non-passive losses can offset W-2 income.
That’s why STRs get so much attention. They open the door to tax savings that long-term rentals don’t.
Long-term rentals depreciate over 27.5 years.
STRs, because they’re considered nonresidential property, depreciate over 39 years. At first glance, that seems worse. But it’s what makes QIP possible.
Short-term rentals are different. If your average guest stay is 7 days or less, the property isn’t treated as a “rental activity.” Instead, it’s treated like a business.
That means if you materially participate for example, 500 hours in a year or 100 hours more than anyone else the losses are non-passive. And non-passive losses can offset W-2 income.
That’s why STRs get so much attention. They open the door to tax savings that long-term rentals don’t.
Long-term rentals depreciate over 27.5 years.
STRs, because they’re considered nonresidential property, depreciate over 39 years. At first glance, that seems worse. But it’s what makes QIP possible.
What Is QIP?
Qualified Improvement Property is a tax category for certain interior improvements to nonresidential buildings, made after the property is placed in service.
Examples that often qualify:
- Drywall, ceilings, partitions
- Flooring, finishes, paint
- Interior lighting and electrical
- Interior plumbing (not structural)
What doesn’t qualify:
- Enlargements to the building
- Structural framework
- Elevators and escalators
- Exterior work
Here’s the key: QIP has a 15-year life, which makes it eligible for bonus depreciation. Instead of spreading those costs over 39 years, you can often deduct them in year one.
And with the new tax bill (OBBBA), QIP is explicitly included, meaning you can take 100% bonus depreciation on qualifying improvements placed in service after January 19, 2025.
And with the new tax bill (OBBBA), QIP is explicitly included, meaning you can take 100% bonus depreciation on qualifying improvements placed in service after January 19, 2025.
A Quick Example
Say you bought an STR for $1M and placed it in service last year. This year, you spend $200K renovating the interior new walls, lighting, flooring.
- Without QIP: 39-year life → about $5K a year in deductions.
- With QIP: 15-year property that qualifies for bonus depreciation → much of the $200K can be written off in year one.
That’s a big difference in how much cash you keep.
Plus, timing matters.
Renovations done before you first place the property in service are just part of your starting basis. QIP only applies to improvements made after the property is already in service.
Plus, timing matters.
Renovations done before you first place the property in service are just part of your starting basis. QIP only applies to improvements made after the property is already in service.
Common Mistakes Investors Make with QIP
Here are a few places we see investors get tripped up:
- Assuming everything qualifies.Not all improvements are QIP. Exterior work, enlargements, and anything structural (like replacing load-bearing walls) don’t make the cut.
- Mixing in pre-service work.If you renovate before the property is available for rent, that’s just part of your original basis. It’s not QIP.
- Counting furnishings.Furniture, appliances, and décor aren’t QIP. They may still be depreciated over a shorter life in a cost seg study, but they don’t fall under this rule.
- Thinking QIP replaces cost seg.It doesn’t. QIP only applies to post-service interior improvements. Cost seg looks at the whole building at purchase. They complement each other, but they’re not the same.
Getting this wrong can mean leaving money on the table—or worse, misclassifying something and raising audit risk.
How QIP Works Alongside Cost Segregation
This is where a lot of people get confused.
- Cost segregation applies when you buy the property:It breaks down the purchase price into shorter-life assets like flooring, cabinets, and site work so you can accelerate depreciation.
- QIP:applies when you renovate after the property is in service. It reclassifies qualifying interior improvements so you can bonus-depreciate them instead of spreading them over 39 years.
They’re two separate buckets, but they work together. Cost seg helps you maximize deductions on the purchase. QIP helps you maximize deductions on improvements.
The takeaway: If you own an STR, you don’t just look at cost seg once and call it done. Anytime you make significant renovations, you should ask whether those dollars qualify as QIP.
The takeaway: If you own an STR, you don’t just look at cost seg once and call it done. Anytime you make significant renovations, you should ask whether those dollars qualify as QIP.
Do You Need a Cost Seg Study to Claim QIP?
Maybe. QIP is its own category in the tax code. If you renovate the interior of a nonresidential property after it’s placed in service, you can claim those improvements as 15-year property and, in most cases, bonus-depreciate them. A CPA can sometimes do this without a full study.
Here’s the catch: most renovation projects are a mix of costs. Some qualify as QIP. Some are personal property (5- or 7-year). Some are land improvements (15-year). And some are structural (39-year).
Without a study—or at least a detailed breakdown—you risk misclassifying costs or defaulting everything to 39 years. That means you either leave money on the table or take a position the IRS could challenge.
So while a cost seg study isn’t required for QIP, it often pays to have one. It’s the best way to make sure every dollar of your renovation spend is captured in the right category.
Here’s the catch: most renovation projects are a mix of costs. Some qualify as QIP. Some are personal property (5- or 7-year). Some are land improvements (15-year). And some are structural (39-year).
Without a study—or at least a detailed breakdown—you risk misclassifying costs or defaulting everything to 39 years. That means you either leave money on the table or take a position the IRS could challenge.
So while a cost seg study isn’t required for QIP, it often pays to have one. It’s the best way to make sure every dollar of your renovation spend is captured in the right category.
Guardrails to Keep in Mind]
- Participation still matters.You need to materially participate to use STR losses against W-2 income.
- Service level matters.If you start offering hotel-like services (daily cleaning, meals, tours), the IRS may treat it as a Schedule C business, subject to self-employment tax.
- Personal use matters.If you stay there more than 14 days or more than 10% of the days it’s rented, the property can be treated as a residence, which changes the rules.
- Loss limits exist.Non-corporate taxpayers can only deduct so much in business losses each year ($250K single / $500K married). Anything above that gets carried forward.
Bottom Line
Short-term rentals are already a strong tax strategy for high-income earners who want to offset W-2 income. Add QIP into the mix, and you can accelerate deductions on interior improvements even further.
The details matter: nonresidential classification, timing of improvements, and what counts as “interior” vs. “structural.” Get those wrong and you lose the benefit. Get them right and you unlock thousands in tax savings.
The details matter: nonresidential classification, timing of improvements, and what counts as “interior” vs. “structural.” Get those wrong and you lose the benefit. Get them right and you unlock thousands in tax savings.
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.