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How Do I Depreciate Leasehold Improvements (QIP) to Save on Taxes?

📖 2,401 words🗓️ Published Jun 23, 2026

Direct Answer

Most interior buildout work qualifies as Qualified Improvement Property (QIP), which the tax code depreciates over 15 years instead of the old 39-year schedule — and because 15 years is under the 20-year threshold, QIP is eligible for bonus depreciation. The money move: classify your buildout as QIP, then take bonus depreciation to write off a large share of it in year one rather than dribbling deductions out over four decades.

The mechanics: QIP is any improvement made by the taxpayer to the interior of nonresidential real property *after* the building was first placed in service. It specifically excludes three things — building enlargements, elevators/escalators, and structural framework. Everything else inside the box — new walls, flooring, lighting, ceilings, interior doors, electrical, plumbing fixtures, HVAC distribution inside the space — generally qualifies.

The CARES Act fix matters here. Before 2020, a drafting error in the 2017 tax law accidentally gave QIP a 39-year life with no bonus eligibility (the infamous "retail glitch"). The CARES Act retroactively corrected it to 15-year property, restoring bonus eligibility back to 2018. So if you placed QIP in service in 2018 or 2019 and used 39 years, you can still catch up.

Run the numbers on a $500,000 leasehold buildout that's all QIP. With 2026 bonus depreciation at 40% (it phases down — 100% through 2022, then 80/60/40/20%; confirm the current-year rate, since Congress has repeatedly restored 100%), you deduct $200,000 in year one, then the remaining $300,000 straight-line over 15 years (~$20,000/year). At a 37% federal rate, that $200,000 year-one deduction is $74,000 in tax saved up front — versus the ~$4,700/year you'd get dribbling $500,000 over 39 years the old way. The NPV gain at an 8% discount rate is roughly $50,000 to $80,000 on a half-million-dollar buildout.

What Counts as QIP — and What Doesn't

Qualifies as QIP (15-year, bonus-eligible):

Interior non-load-bearing walls and partitions
Flooring, ceilings, interior lighting
Interior doors, drywall, finishes
HVAC distribution, electrical, and plumbing *inside* the leased space
Fire protection and security inside the space

Does NOT qualify as QIP:

Enlargement of the building (an addition increasing square footage)
Elevators and escalators
Structural framework — load-bearing walls, the roof structure, foundation
Exterior work — parking lots, sidewalks, signage (those are 15-year *land improvements*, a separate category that's also bonus-eligible)

QIP vs. Section 179 vs. Bonus — Stacking the Three

You have three tools, and the smart play is stacking them in the right order.

Bonus depreciation (Section 168(k)): Applies automatically to all bonus-eligible property unless you elect out. No dollar cap, and it can create or increase a net operating loss that carries forward. Use this for the bulk of QIP.
Section 179 expensing: Lets you immediately expense up to roughly $1.25 million (2026, indexed) of qualifying property, but it cannot create a loss — it's limited to your taxable income. Section 179 *also* covers roof, HVAC, fire, and security systems on nonresidential property that even bonus can't reach. Use 179 for the items bonus misses, or to fine-tune the exact deduction you want.
Straight-line 15-year: Whatever you don't bonus or 179 depreciates evenly over 15 years.

The ordering rule: Section 179 is applied first, then bonus depreciation on what's left, then straight-line on the remainder. A common mistake is taking 179 on everything when you have income limits — sometimes letting bonus do the heavy lifting (because it *can* create a loss to carry forward) is the better cash-flow move. Model both with your CPA.

Tenant vs. Landlord: Who Gets the Deduction

The deduction follows who pays for and owns the improvement, not whose building it is.

Tenant pays and owns the improvements: The tenant depreciates them as QIP, regardless of the lease term. Even if your lease is 5 years and the QIP life is 15, you depreciate over 15 — and if you leave early, you can write off the remaining basis as an abandonment loss when you vacate and surrender the improvements.
Landlord pays via a TI allowance: The landlord owns and depreciates those improvements. If a landlord gives you a $50/sq ft allowance and you spend it, the landlord typically capitalizes and depreciates that as QIP; the allowance is generally not taxable income to you if it's a true construction allowance under a qualified lease.
Tenant overspends the allowance: The portion you fund out of pocket is your QIP to depreciate. Track the split carefully — it's the line between your deduction and the landlord's.

Catching Up on Missed QIP Depreciation

If you placed QIP in service in 2018–2020 and used the wrong 39-year life (the retail-glitch era), you can recover it without amending returns. File Form 3115, Change in Accounting Method, and take a Section 481(a) catch-up adjustment — a single deduction in the current year equal to the depreciation you should have taken. On a large prior buildout, this can be a six-figure current-year deduction. Alternatively, you could amend the affected returns, but Form 3115 is usually cleaner and avoids reopening old years.

How the Deduction Flows in Year One

The number to anchor on: every $100,000 of QIP you accelerate from 39-year straight-line into a year-one bonus deduction is worth roughly $15,000 to $25,000 in NPV, depending on your bracket and discount rate. That's the financing benefit — interest-free money from the IRS for the time value of the deferral.

flowchart TD A[Buildout cost item] --> B{Interior improvement to existing nonresidential building?} B -- No, exterior or structural --> C[39-year property] B -- Yes --> D{Enlargement, elevator/escalator, or framework?} D -- Yes --> C D -- No --> E[Qualifies as QIP - 15-year] E --> F{Recovery life 20 yrs or less?} F -- Yes --> G[Bonus depreciation eligible] G --> H[Year-one write-off + 15-yr balance]

flowchart LR A[$500K QIP buildout] --> B[Section 179 if income allows] A --> C[Bonus depreciation on remainder] C --> D["$200K year-1 at 40% bonus"] A --> E["$300K straight-line / 15 yrs"] E --> F[~$20K per year] D --> G["x 37% = $74K tax saved year 1"] G --> H["NPV gain $50K-$80K at 8%"]

Related on PULSE

[How Do I Avoid Paying for the Landlord's Capital Improvements?](/knowledge/q13676)
[How Does a Cost Segregation Study Cut My Buildout Taxes?](/knowledge/q13791)
[How Do I Avoid Double-Paying Property Taxes in an NNN Lease?](/knowledge/q13660)
[How do MLB and NBA luxury taxes work and what can RevOps learn from them in 2027?](/knowledge/q12998)
[What's the right approach to pricing localization in different regions (FX, taxes, willingness-to-pay)?](/knowledge/q256)
[Should I Hire a Tenant-Rep Broker, and What Do They Save Me?](/knowledge/q13839)

Common Mistakes That Kill QIP Depreciation

The biggest tax-saving opportunity with leasehold improvements is also the easiest to lose if you aren’t careful. One of the most frequent errors is failing to separate QIP-eligible costs from structural or building-system costs on your books. If you lump everything into a single “leasehold improvement” line item, the IRS may reclassify the entire amount as 39-year property—eliminating bonus depreciation eligibility entirely.

Another mistake is not documenting the timeline correctly. QIP must be placed in service *after* the building was first placed in service. If you’re improving a brand-new building that hasn’t been occupied yet, the improvements may not qualify as QIP because they’re considered part of the original construction. Similarly, improvements made before a lease is signed or without a clear tenant obligation can trigger IRS scrutiny.

A third trap is ignoring the “unrelated tenant” rule for certain older tax treatments. While the Tax Cuts and Jobs Act simplified most QIP rules, some leasehold improvements made before 2018 may still be subject to complex “tenant vs. owner” classification tests. If you’re working with a property that has been improved multiple times over several years, a cost-segregation study is often worth the investment to untangle which vintage of improvements qualifies for which depreciation schedule.

How to Maximize Bonus Depreciation on QIP

Bonus depreciation allows you to deduct a significant percentage of QIP costs in the first year the property is placed in service. For 2024, the bonus depreciation rate is 60% (down from 80% in 2023, and scheduled to phase down to 20% in 2026 before expiring in 2027 unless Congress extends it). This means a $100,000 QIP project could yield a $60,000 deduction in year one, with the remaining $40,000 depreciated over 15 years.

To maximize this, time your construction completion strategically. If you finish improvements in December versus January, you can capture bonus depreciation a full year earlier. Also, consider partial placement in service—if a portion of your buildout (like a finished office suite) is ready for use before the rest, you can place that portion in service and claim bonus depreciation on it immediately, rather than waiting for the entire project to finish.

Work with your contractor to break out costs by asset class on invoices. For example, carpeting, movable partitions, and decorative lighting may qualify as 5- or 7-year property under MACRS, which can be even more aggressive than QIP’s 15-year schedule. A cost-segregation study can identify these components and potentially boost your first-year write-off by an additional 10–20%.

State Tax Considerations for QIP Depreciation

Federal bonus depreciation on QIP is generous, but not all states conform to the federal rules. As of 2024, roughly a dozen states—including California, New Jersey, and New York—have decoupled from bonus depreciation, meaning you may have to add back the bonus amount on your state return and depreciate it over the standard 15-year schedule for state tax purposes.

This creates a temporary difference that can complicate multi-state filings. If you operate in a decoupled state, you may need to file separate state depreciation schedules and track deferred tax assets or liabilities. Some states also have their own definitions of QIP—for instance, California requires the improvement to be made under a lease agreement, while federal rules do not.

To avoid surprises, run a state-by-state tax projection before committing to a bonus depreciation strategy. In some cases, it may make sense to forgo bonus depreciation entirely if the state tax hit outweighs the federal benefit—especially if you’re in a high-tax state with no bonus conformity. A CPA familiar with multi-state commercial real estate can model both scenarios and recommend the optimal approach for your specific situation.

FAQ

What exactly qualifies as Qualified Improvement Property (QIP)? QIP includes interior improvements to nonresidential real estate placed in service after the building was first available for use. Common examples are drywall, flooring, lighting, plumbing, and HVAC upgrades inside your leased space. Landscaping, building enlargements, and structural work like new roofs or elevators generally do not qualify.

Can I use bonus depreciation on QIP to accelerate my tax savings? Yes, QIP is eligible for bonus depreciation, which lets you deduct a large percentage of the cost in the first year. Under current rules, that bonus rate is typically 60% to 80% for improvements placed in service in recent years, though the rate is scheduled to phase down over time. Always check the latest IRS guidance for the exact percentage.

What’s the difference between 15-year straight-line and 39-year depreciation for leasehold improvements? With 15-year straight-line depreciation, you write off the cost evenly over 15 years, while 39-year depreciation spreads it out over nearly four decades. The shorter 15-year schedule gives you much larger annual deductions, which can significantly lower your taxable income in the early years of a lease.

Do I need to separate QIP from other building components to get the 15-year benefit? Yes, you must identify and segregate QIP costs from structural components that remain on a 39-year schedule. This often requires a cost segregation study, which breaks down your total construction costs into categories like personal property, land improvements, and building structure. A professional study can maximize your QIP allocation and tax savings.

What happens if I place QIP in service after the building was already used by another tenant? That’s fine—QIP applies to improvements made to existing commercial space, even if the building has been occupied before. The key is that the improvements are interior and not part of a building enlargement or structural change. Previous tenant fit-outs don’t affect your ability to claim QIP on new work.

Are there any traps where QIP depreciation gets disallowed or recaptured? Yes, if you sell the leasehold improvements or terminate the lease early, you may face depreciation recapture, which taxes the gain at ordinary income rates rather than capital gains. Also, if you incorrectly classify non-QIP items as QIP, the IRS can disallow the deductions and impose penalties. Always work with a tax professional to ensure accurate classification.

Sources

IRS, Section 168 and Qualified Improvement Property definition (post-CARES Act)
IRS Publication 946, "How to Depreciate Property" (MACRS, QIP recovery period)
IRS, Section 179 expensing limits and Section 168(k) bonus depreciation rules
IRS Revenue Procedure 2020-25 (QIP change of accounting method, Form 3115)
CARES Act (P.L. 116-136), QIP technical correction
RSMeans and CBRE buildout cost benchmarks (component classification)
BDO / RSM CRE tax advisory, QIP and bonus depreciation stacking guidance

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# How Do I Depreciate Leasehold Improvements (QIP) to Save on Taxes?

## Direct Answer

Most interior buildout work qualifies as **Qualified Improvement Property (QIP)**, which the tax code depreciates over **15 years** instead of the old **39-year** schedule — and because 15 years is under the 20-year threshold, QIP is **eligible for bonus depreciation**. The money move: classify your buildout as QIP, then take **bonus depreciation** to write off a large share of it in **year one** rather than dribbling deductions out over four decades.

The mechanics: **QIP** is any improvement made by the taxpayer to the **interior of nonresidential real property** *after* the building was first placed in service. It specifically **excludes** three things — building **enlargements**, **elevators/escalators**, and **structural framework**. Everything else inside the box — new walls, flooring, lighting, ceilings, interior doors, electrical, plumbing fixtures, HVAC distribution inside the space — generally qualifies.

The **CARES Act fix** matters here. Before 2020, a drafting error in the 2017 tax law accidentally gave QIP a 39-year life with no bonus eligibility (the infamous "**retail glitch**"). The CARES Act **retroactively corrected it to 15-year property**, restoring bonus eligibility back to **2018**. So if you placed QIP in service in 2018 or 2019 and used 39 years, you can still catch up.

Run the numbers on a **$500,000** leasehold buildout that's all QIP. With **2026 bonus depreciation at 40%** (it phases down — 100% through 2022, then 80/60/40/20%; confirm the current-year rate, since Congress has repeatedly restored 100%), you deduct **$200,000** in year one, then the remaining **$300,000** straight-line over 15 years (**~$20,000/year**). At a **37%** federal rate, that **$200,000** year-one deduction is **$74,000** in tax saved up front — versus the **~$4,700/year** you'd get dribbling **$500,000** over 39 years the old way. The **NPV gain** at an 8% discount rate is roughly **$50,000 to $80,000** on a half-million-dollar buildout.

## What Counts as QIP — and What Doesn't

![How Do I Depreciate Leasehold Improvements (QIP) to Save on Taxes? — What Counts as QIP — and What Doesn't](https://image.pollinations.ai/prompt/high%20quality%20editorial%20business%20professional%20office%20photograph%20illustrating%20What%20Counts%20as%20QIP%20%E2%80%94%20and%20What%20Doesn't%20How%20Do%20I%20Depreciate%20Leasehold%20Improvements%2C%20realistic%20magazine%20style%2C%20warm%20light%2C%20no%20text%2C%20no%20watermark?width=1200&height=675&nologo=true&model=flux&seed=59411)


```mermaid
flowchart TD
    A[Buildout cost item] --> B{Interior improvement to existing nonresidential building?}
    B -- No, exterior or structural --> C[39-year property]
    B -- Yes --> D{Enlargement, elevator/escalator, or framework?}
    D -- Yes --> C
    D -- No --> E[Qualifies as QIP - 15-year]
    E --> F{Recovery life 20 yrs or less?}
    F -- Yes --> G[Bonus depreciation eligible]
    G --> H[Year-one write-off + 15-yr balance]
```

**Qualifies as QIP (15-year, bonus-eligible):**
- Interior **non-load-bearing walls** and partitions
- **Flooring**, ceilings, interior **lighting**
- Interior **doors**, drywall, finishes
- **HVAC distribution**, electrical, and plumbing *inside* the leased space
- Fire protection and security inside the space

**Does NOT qualify as QIP:**
- **Enlargement** of the building (an addition increasing square footage)
- **Elevators and escalators**
- **Structural framework** — load-bearing walls, the roof structure, foundation
- **Exterior** work — parking lots, sidewalks, signage (those are 15-year *land improvements*, a separate category that's also bonus-eligible)

## QIP vs. Section 179 vs. Bonus — Stacking the Three

![How Do I Depreciate Leasehold Improvements (QIP) to Save on Taxes? — QIP vs. Section 179 vs. Bonus — Stacking the Three](https://image.pollinations.ai/prompt/high%20quality%20editorial%20business%20professional%20office%20photograph%20illustrating%20QIP%20vs.%20Section%20179%20vs.%20Bonus%20%E2%80%94%20Stacking%20the%20Three%20How%20Do%20I%20Depreciate%20Leasehold%2C%20realistic%20magazine%20style%2C%20warm%20light%2C%20no%20text%2C%20no%20watermark?width=1200&height=675&nologo=true&model=flux&seed=50946)


You have three tools, and the smart play is stacking them in the right order.

- **Bonus depreciation (Section 168(k)):** Applies automatically to all bonus-eligible property unless you elect out. No dollar cap, and it can create or increase a **net operating loss** that carries forward. Use this for the bulk of QIP.
- **Section 179 expensing:** Lets you immediately expense up to roughly **$1.25 million** (2026, indexed) of qualifying property, but it **cannot create a loss** — it's limited to your taxable income. Section 179 *also* covers roof, HVAC, fire, and security systems on nonresidential property that even bonus can't reach. Use 179 for the items bonus misses, or to fine-tune the exact deduction you want.
- **Straight-line 15-year:** Whatever you don't bonus or 179 depreciates evenly over 15 years.

**The ordering rule:** Section 179 is applied **first**, then bonus depreciation on what's left, then straight-line on the remainder. A common mistake is taking 179 on everything when you have income limits — sometimes letting bonus do the heavy lifting (because it *can* create a loss to carry forward) is the better cash-flow move. Model both with your CPA.

## Tenant vs. Landlord: Who Gets the Deduction

![How Do I Depreciate Leasehold Improvements (QIP) to Save on Taxes? — Tenant vs. Landlord: Who Gets the Deduction](https://image.pollinations.ai/prompt/high%20quality%20editorial%20business%20professional%20office%20photograph%20illustrating%20Tenant%20vs.%20Landlord%3A%20Who%20Gets%20the%20Deduction%20How%20Do%20I%20Depreciate%20Leasehold%20Improv%2C%20realistic%20magazine%20style%2C%20warm%20light%2C%20no%20text%2C%20no%20watermark?width=1200&height=675&nologo=true&model=flux&seed=79810)


The deduction follows **who pays for and owns the improvement**, not whose building it is.

- **Tenant pays and owns the improvements:** The **tenant** depreciates them as QIP, regardless of the lease term. Even if your lease is 5 years and the QIP life is 15, you depreciate over 15 — and if you leave early, you can **write off the remaining basis** as an abandonment loss when you vacate and surrender the improvements.
- **Landlord pays via a TI allowance:** The **landlord** owns and depreciates those improvements. If a landlord gives you a **$50/sq ft** allowance and you spend it, the landlord typically capitalizes and depreciates that as QIP; the allowance is generally **not taxable income** to you if it's a true construction allowance under a qualified lease.
- **Tenant overspends the allowance:** The portion **you** fund out of pocket is **your** QIP to depreciate. Track the split carefully — it's the line between your deduction and the landlord's.

## Catching Up on Missed QIP Depreciation

If you placed QIP in service in **2018–2020** and used the wrong 39-year life (the retail-glitch era), you can recover it without amending returns. File **Form 3115, Change in Accounting Method**, and take a **Section 481(a) catch-up adjustment** — a single deduction in the current year equal to the depreciation you should have taken. On a large prior buildout, this can be a **six-figure** current-year deduction. Alternatively, you could amend the affected returns, but Form 3115 is usually cleaner and avoids reopening old years.

## How the Deduction Flows in Year One

```mermaid
flowchart LR
    A[$500K QIP buildout] --> B[Section 179 if income allows]
    A --> C[Bonus depreciation on remainder]
    C --> D[$200K year-1 at 40% bonus]
    A --> E[$300K straight-line / 15 yrs]
    E --> F[~$20K per year]
    D --> G[x 37% = $74K tax saved year 1]
    G --> H[NPV gain $50K-$80K at 8%]
```

The number to anchor on: every **$100,000** of QIP you accelerate from 39-year straight-line into a year-one bonus deduction is worth roughly **$15,000 to $25,000** in NPV, depending on your bracket and discount rate. That's the financing benefit — interest-free money from the IRS for the time value of the deferral.

<!--pillar-weave-->
## Related on PULSE

- [How Do I Avoid Paying for the Landlord's Capital Improvements?](/knowledge/q13676)
- [How Does a Cost Segregation Study Cut My Buildout Taxes?](/knowledge/q13791)
- [How Do I Avoid Double-Paying Property Taxes in an NNN Lease?](/knowledge/q13660)
- [How do MLB and NBA luxury taxes work and what can RevOps learn from them in 2027?](/knowledge/q12998)
- [What's the right approach to pricing localization in different regions (FX, taxes, willingness-to-pay)?](/knowledge/q256)
- [Should I Hire a Tenant-Rep Broker, and What Do They Save Me?](/knowledge/q13839)

## Common Mistakes That Kill QIP Depreciation

The biggest tax-saving opportunity with leasehold improvements is also the easiest to lose if you aren’t careful. One of the most frequent errors is **failing to separate QIP-eligible costs from structural or building-system costs** on your books. If you lump everything into a single “leasehold improvement” line item, the IRS may reclassify the entire amount as 39-year property—eliminating bonus depreciation eligibility entirely.

Another mistake is **not documenting the timeline correctly**. QIP must be placed in service *after* the building was first placed in service. If you’re improving a brand-new building that hasn’t been occupied yet, the improvements may not qualify as QIP because they’re considered part of the original construction. Similarly, improvements made before a lease is signed or without a clear tenant obligation can trigger IRS scrutiny.

A third trap is **ignoring the “unrelated tenant” rule** for certain older tax treatments. While the Tax Cuts and Jobs Act simplified most QIP rules, some leasehold improvements made before 2018 may still be subject to complex “tenant vs. owner” classification tests. If you’re working with a property that has been improved multiple times over several years, a cost-segregation study is often worth the investment to untangle which vintage of improvements qualifies for which depreciation schedule.

## How to Maximize Bonus Depreciation on QIP

Bonus depreciation allows you to deduct a significant percentage of QIP costs in the first year the property is placed in service. For 2024, the bonus depreciation rate is **60%** (down from 80% in 2023, and scheduled to phase down to 20% in 2026 before expiring in 2027 unless Congress extends it). This means a $100,000 QIP project could yield a $60,000 deduction in year one, with the remaining $40,000 depreciated over 15 years.

To maximize this, **time your construction completion strategically**. If you finish improvements in December versus January, you can capture bonus depreciation a full year earlier. Also, consider **partial placement in service**—if a portion of your buildout (like a finished office suite) is ready for use before the rest, you can place that portion in service and claim bonus depreciation on it immediately, rather than waiting for the entire project to finish.

Work with your contractor to **break out costs by asset class** on invoices. For example, carpeting, movable partitions, and decorative lighting may qualify as 5- or 7-year property under MACRS, which can be even more aggressive than QIP’s 15-year schedule. A cost-segregation study can identify these components and potentially boost your first-year write-off by an additional 10–20%.

## State Tax Considerations for QIP Depreciation

Federal bonus depreciation on QIP is generous, but **not all states conform** to the federal rules. As of 2024, roughly a dozen states—including California, New Jersey, and New York—have **decoupled** from bonus depreciation, meaning you may have to add back the bonus amount on your state return and depreciate it over the standard 15-year schedule for state tax purposes.

This creates a **temporary difference** that can complicate multi-state filings. If you operate in a decoupled state, you may need to file separate state depreciation schedules and track deferred tax assets or liabilities. Some states also have their own definitions of QIP—for instance, California requires the improvement to be made under a lease agreement, while federal rules do not.

To avoid surprises, **run a state-by-state tax projection** before committing to a bonus depreciation strategy. In some cases, it may make sense to forgo bonus depreciation entirely if the state tax hit outweighs the federal benefit—especially if you’re in a high-tax state with no bonus conformity. A CPA familiar with multi-state commercial real estate can model both scenarios and recommend the optimal approach for your specific situation.

## FAQ

**What exactly qualifies as Qualified Improvement Property (QIP)?**  
QIP includes interior improvements to nonresidential real estate placed in service after the building was first available for use. Common examples are drywall, flooring, lighting, plumbing, and HVAC upgrades inside your leased space. Landscaping, building enlargements, and structural work like new roofs or elevators generally do not qualify.

**Can I use bonus depreciation on QIP to accelerate my tax savings?**  
Yes, QIP is eligible for bonus depreciation, which lets you deduct a large percentage of the cost in the first year. Under current rules, that bonus rate is typically 60% to 80% for improvements placed in service in recent years, though the rate is scheduled to phase down over time. Always check the latest IRS guidance for the exact percentage.

**What’s the difference between 15-year straight-line and 39-year depreciation for leasehold improvements?**  
With 15-year straight-line depreciation, you write off the cost evenly over 15 years, while 39-year depreciation spreads it out over nearly four decades. The shorter 15-year schedule gives you much larger annual deductions, which can significantly lower your taxable income in the early years of a lease.

**Do I need to separate QIP from other building components to get the 15-year benefit?**  
Yes, you must identify and segregate QIP costs from structural components that remain on a 39-year schedule. This often requires a cost segregation study, which breaks down your total construction costs into categories like personal property, land improvements, and building structure. A professional study can maximize your QIP allocation and tax savings.

**What happens if I place QIP in service after the building was already used by another tenant?**  
That’s fine—QIP applies to improvements made to existing commercial space, even if the building has been occupied before. The key is that the improvements are interior and not part of a building enlargement or structural change. Previous tenant fit-outs don’t affect your ability to claim QIP on new work.

**Are there any traps where QIP depreciation gets disallowed or recaptured?**  
Yes, if you sell the leasehold improvements or terminate the lease early, you may face depreciation recapture, which taxes the gain at ordinary income rates rather than capital gains. Also, if you incorrectly classify non-QIP items as QIP, the IRS can disallow the deductions and impose penalties. Always work with a tax professional to ensure accurate classification.

## Sources

- IRS, Section 168 and Qualified Improvement Property definition (post-CARES Act)
- IRS Publication 946, "How to Depreciate Property" (MACRS, QIP recovery period)
- IRS, Section 179 expensing limits and Section 168(k) bonus depreciation rules
- IRS Revenue Procedure 2020-25 (QIP change of accounting method, Form 3115)
- CARES Act (P.L. 116-136), QIP technical correction
- RSMeans and CBRE buildout cost benchmarks (component classification)
- BDO / RSM CRE tax advisory, QIP and bonus depreciation stacking guidance

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