What Is Qualified Improvement Property (QIP)?

Qualified improvement property is the tax label that turns an interior build-out of a commercial building from a 39-year deduction into a 15-year one, and from there into a first-year write-off. This guide covers the definition in IRC 168(e)(6), the three exclusions, the recovery periods, how bonus depreciation and section 179 apply, an illustration for a retail build-out, and who depreciates a tenant improvement when the landlord or the tenant pays.

The definition: interior, nonresidential, after the building was first placed in service

IRC 168(e)(6)(A) defines qualified improvement property as “any improvement made by the taxpayer to an interior portion of a building which is nonresidential real property if such improvement is placed in service after the date such building was first placed in service.” Each phrase does work:

• Made by the taxpayer. You improved the building. Improvements you bought with the building are part of the building.
• Interior portion. Exterior work, site work and the roof are outside the definition.
• Nonresidential real property. Offices, retail, restaurants, warehouses, clinics and similar buildings. Apartment buildings and rental houses are residential rental property and do not qualify.
• After the building was first placed in service. Publication 946 reads this as first placed in service by any person. The initial fit-out of a brand-new building is not QIP; the same work done to an existing building is.

The statute does not list examples. It defines QIP by location and by exclusion, so a build-out is tested item by item against the four phrases above and the three exclusions below.

The three exclusions

IRC 168(e)(6)(B) removes any improvement whose cost is attributable to:

• the enlargement of the building,
• any elevator or escalator, or
• the internal structural framework of the building.

Those costs stay in the 39-year building. A contractor's invoice that mixes a mezzanine, a new elevator and interior finishes needs to be split, because only the finishes are QIP. Publication 946 adds that QIP must be section 1250 property, which is real property; equipment installed during the build-out, such as kitchen appliances or shelving, is section 1245 property with its own shorter recovery period.

How QIP is depreciated: 15 years straight line, or 100% bonus

Three provisions in IRC 168 fix the treatment. Section 168(e)(3)(E)(vii) lists qualified improvement property as 15-year property. Section 168(b)(3)(G) requires the straight line method. And the table in section 168(g)(3)(B) assigns it a 20-year class life, which is its recovery period under the alternative depreciation system. As 15-year property it uses the half-year convention (or mid-quarter, if more than 40% of the year's property arrives in the last three months), not the mid-month convention that applies to the building itself.

The 15-year period is what makes bonus depreciation available: IRC 168(k)(2)(A) covers MACRS property with a recovery period of 20 years or less. For QIP acquired after January 19, 2025, the allowance is 100% of the basis, taken in the year the improvement is placed in service, unless you elect out of the 15-year class for that year. The election out, the dates and the phase-down for older contracts are in the bonus depreciation guide.

Section 179 and QIP: the qualified real property election

IRC 179(d)(1)(B)(ii) lets a taxpayer elect to treat “qualified real property” as section 179 property, and IRC 179(e) defines that term as qualified improvement property plus four other improvements to nonresidential real property made after the building was first placed in service: roofs, heating, ventilation and air-conditioning property, fire protection and alarm systems, and security systems. The four extras are not QIP, and to the extent they are part of the 39-year building, bonus depreciation cannot reach them; section 179 is their first-year route.

The election is made on Form 4562, Part I, item by item, and it lives inside the normal limits described in the section 179 guide: $2,560,000 for tax years beginning in 2026, phased out above $4,090,000 of purchases, and never more than taxable income from the active conduct of a business. The Form 4562 instructions confirm that a section 179 amount on qualified real property disallowed by the income limit carries over to the next year on line 13. When bonus is 100% and the income limit does not bind, section 179 on QIP changes nothing federally; where it earns its keep is in states that allow section 179 but not bonus, and for the roofs and systems bonus cannot touch. The trade-offs are compared in section 179 vs bonus depreciation.

Illustration: a $400,000 retail build-out

The first row is the default and needs no election. The point of the table is the size of the gap: $340,000 in 2026 against $11,333, on the same invoices, decided by whether the work meets a definition and whether an election-out statement is attached. A cost segregation study is the usual way to document the split between QIP, the excluded structural costs and any 5- or 7-year equipment in the same project.

Tenant improvements: who depreciates what

A tenant improvement can be paid for by the landlord, by the tenant, or by the landlord through an allowance. The depreciation follows ownership and cost, not the lease:

• The tenant pays and owns the work. Publication 946 says a lessee generally cannot depreciate leased property but can depreciate capital improvements it makes to it. IRC 168(i)(8)(A) then requires the improvement to be depreciated under section 168, which for QIP means 15 years or bonus, regardless of a 5-year lease.
• The landlord pays. The landlord depreciates the improvement as its own QIP. If the improvement was made for the tenant and is irrevocably abandoned when that lease ends, IRC 168(i)(8)(B) treats it as disposed of at that point, so the remaining basis is written off then.
• A construction allowance. Who owns the improvement, and who reports the allowance, depends on the lease terms; IRC 168(i)(8)(C) points to section 110(b) for improvements built with cash or rent reductions from the landlord. Settle that before the work starts, because it decides who gets the deduction.

Two things to check before you rely on bonus for QIP

Electing real property trades or businesses. A landlord or developer that elected out of the IRC 163(j) interest limitation must use the alternative depreciation system for its nonresidential real property, residential rental property and qualified improvement property. The Form 4562 instructions list that property among the assets required to use ADS, and IRC 168(k)(2)(D) excludes ADS property from bonus depreciation. For such a business, QIP is 20-year straight line and the fourth row of the table applies.

Recapture. The Form 4562 instructions state that when property on which a special depreciation allowance was claimed is disposed of, gain is generally recaptured as ordinary income up to the depreciation previously allowed, including the allowance. A build-out written off at 100% and sold with the business five years later carries that exposure.

Sources: 26 U.S.C. 168(e)(6), (e)(3)(E)(vii), (b)(3)(G), (g)(3)(B), (k) and (i)(8); 26 U.S.C. 179(d)(1) and (e), qualified real property; IRS Publication 946 (2025), How To Depreciate Property; IRS, 2025 Instructions for Form 4562. Rules and amounts checked against these sources on September 26, 2026. This is general information, not tax advice for your situation. Tax services are provided by licensed tax professionals under a separate engagement agreement. BEG does not provide tax advice.