Qualified improvement property (QIP) is generally a 15-year class of eligible interior improvements to an existing nonresidential building. It is not a label for every renovation, and a residential rental apartment renovation does not become QIP merely because it is interior work. The current bonus-depreciation law generally provides 100% additional first-year depreciation for qualified property acquired and placed in service after January 19, 2025; it does not phase down to 80% in 2027. A deduction still depends on the asset classification, acquisition and placed-in-service facts, taxpayer elections, ownership, and other limitations. See IRS Publication 946 and Internal Revenue Bulletin 2026-06.
Renovating a rental or tenant space now? Book a Return Review Call so AE can review the building classification, invoices, and planned filing treatment before you claim QIP or bonus depreciation.
Does an apartment or residential rental renovation qualify as QIP?
Generally no. QIP must be an improvement to the interior of nonresidential real property made and placed in service after the building was first placed in service. A residential rental building generally retains a 27.5-year building-improvement recovery period under the general depreciation system, although separately identifiable personal property or land improvements may have different lives when supported by the facts. First confirm the building's classification; the 80%-of-gross-rental-income dwelling-unit test in Publication 946 matters more than calling the project “commercial” in a contract. A mixed-use building needs an allocation and a review of which building or portion the work actually improves.
For example, an owner spends $400,000 renovating apartment interiors and another $70,000 on separately invoiced appliances. Do not report the entire $470,000 as 15-year QIP or deduct it all under bonus depreciation. First separate true repairs from capital improvements, identify each depreciable asset, and test the appliance cost and acquisition dates independently. The correct current-year deduction cannot be calculated from the invoice total alone. The same interior work in an existing office building may present a QIP question that the apartment work does not.
Qualified Improvement Property Definition and Qualifying Expenditures
QIP generally means a taxpayer-made interior improvement to a building that is nonresidential real property, placed in service after the building was first placed in service by any person. It excludes building enlargement, elevators or escalators, and the internal structural framework. Interior location alone does not settle the classification: some costs are repairs, some are separately classified personal property, and some remain 39-year building work. A retail or restaurant build-out therefore needs line-item review of plans, invoices, and building systems; a tenant improvement allowance does not automatically establish either QIP status or which party depreciates the work. Publication 946's QIP definition and the tangible-property regulations overview are useful starting points.
Placed in Service Requirements and Substantial Completion
QIP must be ready and available for its assigned business or income-producing use before depreciation begins. A tenant completing a build-out on December 15 and opening the space on December 20 may have a December placed-in-service date if the facts support it; a January completion ordinarily belongs to the following year. For qualified property acquired and placed in service after January 19, 2025, the current federal bonus percentage is generally 100%, subject to the applicable election and eligibility rules, not a scheduled 80% rate in 2027. Contract date, construction start, asset completion, and occupancy records should be reconciled before year-end filing. A large deduction does not automatically offset a landlord's wages: passive-activity and other tax limitations must be tested separately. See Publication 946 and AE's loss-usability guide.
Cost Basis Determination and Allocation
Capitalized QIP basis can include direct construction labor and materials and properly allocable design, permit, and other production costs. A $700,000 contractor invoice plus $50,000 of design fees is not automatically $750,000 of QIP: first allocate the bills among eligible interior building improvements, separately classified assets, repairs, and excluded work. Painting can be a deductible repair in one fact pattern and part of a capital improvement in another; the invoice label is not dispositive. Keep contracts, plans, payment records, change orders, and a dated allocation workpaper. The IRS tangible-property guidance addresses whether expenditures are repairs or capital improvements.
Bonus Depreciation Under Current Law
Section 168(k) generally allows a 100% additional first-year deduction for eligible QIP acquired and placed in service after January 19, 2025; earlier acquisition dates and binding contracts can produce a different percentage. It is incorrect to apply a single 100% rule to every QIP asset placed in service from 2017 through 2026. If an owner has $800,000 of documented eligible QIP and all bonus conditions are met, the federal depreciation deduction on that layer could be $800,000 in its placed-in-service year. That is not a guaranteed $296,000 tax saving: taxable income, passive-loss rules, elections, state conformity, and future recapture affect the outcome. Compare the current deduction with regular MACRS depreciation and the expected holding period using the actual return. IRS 2026-06 guidance explains the restored 100% rule and effective dates.
Planning for 2027 and Later
Current law does not schedule an 80% bonus rate for 2027 or a phase-out through 2030. Timing still matters because an asset must be placed in service, and a pre-January 20, 2025 binding contract can change the applicable rate. Before moving a renovation to December, compare the actual asset list, completion evidence, elections, passive-loss usability, state law, cash flow, and possible sale-year recapture. For example, a nominal $800,000 deduction is not worth $296,000 of immediate federal cash savings if the owner cannot currently use the resulting loss. A forecast should show usable current tax benefit, suspended deductions, regular-depreciation alternative, and the expected exit rather than multiplying project cost by a marginal rate.
Coordination with Section 179 Expensing
QIP can also be eligible for a Section 179 election, but Section 179 and bonus depreciation have different limits, elections, and ordering. For tax years beginning in 2026, the federal Section 179 maximum is $2,560,000 and begins phasing out when qualifying property placed in service exceeds $4,090,000; a taxable-business-income limitation also applies. The former $1,220,000 figure on this page was not the 2026 limit. For a $2 million eligible QIP project, neither a $2 million bonus deduction nor a $2 million Section 179 deduction should be assumed until the asset list, other acquisitions, income limit, election, and state treatment are reviewed. IRS Revenue Procedure 2025-32 publishes the 2026 inflation-adjusted limits; AE's comparison explains the filing trade-offs.
Tenant Reimbursement and Cost Allocation Issues
Tenant improvement allowances and reimbursements require a separate ownership-and-income analysis; a $500,000 reimbursement does not automatically reduce the landlord's tax basis to zero. The lease, who paid contractors, who bears economic risk, who owns the improvements for tax purposes, and whether the payment is rent, an allowance, or another arrangement all matter. Both parties should reconcile the same project costs so they do not each depreciate the same basis. Lease drafting can clarify facts but cannot alone guarantee a deduction. Gather the executed lease and amendments, allowance agreement, invoices, payment ledger, lien waivers, and both parties' fixed-asset treatment before reporting the allowance.
Case Study: Retail Build-Out and Bonus Depreciation
Suppose a commercial landlord spends $300,000 on an existing retail-space build-out placed in service in 2026. The review supports $180,000 of interior Section 1250 work meeting the QIP definition, $50,000 of separately identified five-year property, and $70,000 of other building work. If the two shorter-life layers meet the post-January 19, 2025 acquisition and other bonus rules and no election changes the treatment, a $230,000 additional first-year deduction may be available, with regular depreciation considered for the remaining $70,000. This is a classification example, not a promised $111,000 federal or $24,000 state tax saving. The taxpayer's actual return, passive-loss position, state conformity, and future recapture determine value. A study should document why each cost belongs in its assigned class rather than applying a flat percentage to the invoice.
What to review before filing the renovation return
- Identify each building and confirm nonresidential versus residential rental status; do not classify apartment interiors as QIP by analogy to a retail tenant space.
- Separate repairs, personal property, land improvements, eligible QIP, and longer-life building work using plans and itemized costs.
- Confirm who owns and paid for tenant work, the binding-contract and placed-in-service dates, and any depreciation elections.
- Model current deduction usability, state differences, and sale-year recapture before ordering a cost segregation study or amending a filed return.
Bring AE the executed lease, improvement agreement, contractor invoices, fixed-asset schedule, building-use and rent records, prior Forms 4562, and any proposed study. Book a Return Review Call to decide whether the interior work is QIP, another depreciable class, a repair, or a correction to a prior return.