Qualified Improvement Property (QIP) & Leasehold Improvements: 15-Year Depreciation & Bonus Eligibility Guide
How IRC Section 168(e)(6) governs commercial leasehold improvements, the 3 statutory exclusions, tenant improvement allowances, and when an engineering study is required.
Matthew Gigantelli
Lead Cost Seg Engineer · ASCSP M009-25
What Is the Depreciation Life of Leasehold Improvements (QIP)?
Under IRC Section 168(e)(6) (as corrected by the CARES Act technical amendment and preserved under Public Law 119-21), Qualified Improvement Property (QIP) covers any improvement made by the taxpayer to an interior portion of a nonresidential building placed in service after the date the building was first placed in service (excluding building enlargements, elevators or escalators, and the internal structural framework). QIP carries a 15-year straight-line MACRS recovery period (20-year ADS) and qualifies for 100% bonus depreciation for qualified property acquired and placed in service after January 19, 2025 (compared with 40% for property acquired before January 20, 2025).
1. What Qualifies as Qualified Improvement Property (QIP) Under IRC Section 168(e)(6)?
Prior to the Tax Cuts and Jobs Act (TCJA), the Internal Revenue Code maintained three separate 15-year commercial improvement categories: Qualified Leasehold Improvement Property (QLIP, which required a lease between unrelated parties and a building over 3 years old), Qualified Restaurant Property, and Qualified Retail Improvement Property. Congress consolidated all three into a single statutory definition: Qualified Improvement Property (QIP) under IRC Section 168(e)(6).
Today, whether a commercial space is owner-occupied or leased to a tenant, an improvement qualifies as 15-year QIP if it meets four strict tests:
- Made by the Taxpayer Requirement (Treas. Reg. 1.168(b)-1(a)(5)): You must actually construct or pay for the improvement yourself. If you buy an existing office or retail building that already had a $500,000 tenant build-out installed by the prior owner, your purchased basis in that existing interior is NOT QIP; you must use an engineering office or commercial cost segregation study to reclassify eligible 5-year and 15-year components out of the 39-year acquisition basis.
- Interior Portion of the Building: The improvement must be physically inside the building envelope (interior drywall partitions, acoustic ceilings, interior lighting, interior doors, restroom fixtures, interior ductwork, and floor finishes).
- Nonresidential Real Property Only: The building must be 39-year commercial property (retail, office, industrial warehouse, medical, restaurant, or hotel/transient lodging). Residential apartment buildings (27.5-year MACRS) are excluded from QIP.
- Placed in Service After the Building Was First Placed in Service: The improvement must occur after the building's original placed-in-service date.
Quick QIP & Leasehold Build-Out Savings Estimator
Estimate Year-1 QIP & 5-year personal property deductions from your commercial interior remodel budget.
2. The 3 Statutory Exclusions Under IRC Section 168(e)(6)(B)
Even on an interior commercial remodel, general contractors submit pay applications (AIA G702/G703) that bundle QIP-eligible interior finishes together with excluded structural work. Under IRC Section 168(e)(6)(B), three categories of costs are strictly excluded from 15-year QIP and must remain 39-year real property (unless reclassified as 5-year personal property):
| Improvement Component | Qualifies as 15-Yr QIP? | Correct MACRS Recovery Class | Engineering / Statutory Rule |
|---|---|---|---|
| Non-load-bearing interior demising walls, drywall, acoustic ceilings, interior doors | Yes (QIP) | 15-Yr SL (Bonus Eligible) | Interior non-structural improvement under IRC Section 168(e)(6)(A). |
| Removable carpet tiles, decorative millwork, dedicated server/POS wiring, window blinds | Better: 5-Yr Personal Property | 5-Yr 200% DB (Bonus Eligible) | Reclassified via cost segregation to 5-year Asset Class 57.0 (faster than 15-yr QIP if no bonus or state decoupling). |
| Building enlargement (adding a 3,000 sq ft wing or mezzanine that expands building volume) | No (Excluded) | 39-Yr Nonresidential Real Property | Excluded under IRC Section 168(e)(6)(B)(i); only 5-year personal property inside the addition can be accelerated via cost seg. |
| Elevators and escalators installed or modernized during remodel | No (Excluded) | 39-Yr Nonresidential Real Property | Excluded from QIP under IRC Section 168(e)(6)(B)(ii) and not eligible as IRC Section 179(e) qualified real property (which is limited to QIP, roofs, HVAC, fire protection/alarm, and security systems). |
| Internal structural framework (load-bearing columns, shear walls, floor joists, steel beams) | No (Excluded) | 39-Yr Nonresidential Real Property | Excluded under IRC Section 168(e)(6)(B)(iii) and Treas. Reg. 1.48-12(b)(3)(iii). |
| Rooftop package HVAC unit, roof membrane replacement, exterior facade & storefront glass | No (Exterior) | 39-Yr (or IRC 179(e) Qualified Real Property) | Fails the "interior portion" requirement of QIP, though roofs, HVAC, fire protection, and security systems may qualify for Section 179 expensing under IRC Section 179(e). |
3. Tenant Improvement Allowances (TIAs): Who Takes the Depreciation Deduction?
In commercial office, medical, and retail leases, landlords frequently provide a Tenant Improvement Allowance (TIA) (for example, $65 per rentable square foot) toward the tenant's build-out. Who gets to depreciate the leasehold improvements and claim bonus depreciation depends on tax ownership of the improvements and IRC Section 110:
- Landlord-Owned Improvements: If the landlord funds the TIA and retains legal and tax ownership of the build-out under the lease agreement (or under IRC Section 110(b) for qualified short-term retail leases of 15 years or less where the allowance is excluded from the tenant's gross income), the landlord capitalizes the TIA and depreciates the eligible interior costs as 15-year QIP (and 5-year personal property via cost segregation).
- Tenant-Paid Excess Build-Out Costs: Any construction costs paid out-of-pocket by the tenant above the landlord's allowance are capitalized on the tenant's fixed asset schedule. Even if the lease term is only 5 or 7 years, IRC Section 168(i)(8) requires the tenant to depreciate leasehold improvements over the statutory MACRS recovery period (15 years for QIP, 5 years for tangible personal property), NOT over the shorter lease term. If the tenant vacates at lease expiration and abandons the improvements without compensation, the tenant writes off any remaining unrecovered basis as an abandonment loss in that year.
4. How Cost Segregation Supercharges Commercial Renovations & Leasehold Build-Outs
A common mistake we see when reviewing CPA fixed asset schedules is lumping an entire $850,000 commercial renovation contract into either 39-year building (losing hundreds of thousands in Year-1 deductions) or 100% into 15-year QIP (creating an audit exposure when the contractor invoice included exterior storefront work, structural steel framing, rooftop RTUs, or parking lot repaving).
An engineering renovation cost segregation study breaks the contractor's schedule of values into four audit-defensible buckets:
- 5-Year Tangible Personal Property (Asset Class 57.0): Specialty lighting, millwork, movable partitions, dedicated equipment circuits, process plumbing, and carpeting.
- 15-Year Qualified Improvement Property (IRC Section 168(e)(6)): Interior non-structural drywall, acoustical ceilings, interior doors, interior ductwork distribution, and restroom build-outs.
- 15-Year Land Improvements (Asset Class 00.3): Exterior ADA ramps, parking lot striping, site lighting, bollards, and landscaping.
- Partial Asset Disposition (Treas. Reg. 1.168(i)-8): Quantifying the remaining undepreciated basis of demolished interior walls, old flooring, and retired lighting so you can write off the disposed components immediately in the year of demolition (see our Partial Asset Disposition guide).