How to Write Off Your Entire Buildout This Year with QIP
- Rick Ruberg
- Feb 11
- 6 min read
Updated: Apr 14
When you're stepping into your first commercial building (whether it's a retail storefront, an office suite, or a restaurant space) the last thing on your mind is probably depreciation. However, you might want to take a closer look at Qualified Improvement Property (QIP), as it could be a valuable tax strategy worth exploring.
In this article, I’m sharing insights not just from studying the rules but from actually applying them in my own rental investments. I’ll answer everything that first-time commercial building owners might need to know about Qualified Improvement Property (QIP).
What Exactly Is Qualified Improvement Property?
Think of QIP as a way for the government to reward you for sprucing up the interior of a commercial building that's already in use. We're talking about renovations to nonresidential spaces.
These improvements need to take place after the building has been officially put into service. You can't claim QIP for the initial buildout when the building is first constructed. It's specifically for enhancements made after that initial use.
So if I buy an existing office building and gut the interior to modernize it, that could qualify?
Exactly. Let's say you purchase a warehouse that was built in 2010 and placed in service back then. In 2025, you decide to build out a new office space inside; new walls, lighting, flooring, the works. That buildout can qualify as QIP.
But if those improvements were already done by the previous owner before you bought it, you can't claim bonus depreciation on them.
This is why having solid documentation is so important. You really need to keep clear records of everything you did after taking ownership, like construction schedules and detailed cost breakdowns.
What Types of Improvements Actually Qualify as QIP?
The list is pretty extensive for interior work:
Interior walls and drywall
Drop ceilings and flooring
Lighting systems and electrical work
Interior plumbing and HVAC ductwork
Paint and interior finishes
Interior doors and hardware
Security systems inside the building
Basically, think about everything that makes the inside of your commercial space functional and attractive to tenants or customers.
What about things that don't qualify?
Here's where people get tripped up. Exterior improvements never qualify as QIP. So roofing, parking lot paving, landscaping, exterior lighting. None of that counts as QIP. Plus, you can't factor in structural changes either, like adding more square footage to the building, putting in elevators or escalators, or altering the internal structural framework.
One area that confuses people is HVAC. Some HVAC components can qualify, but it depends on location. Internal assets like ductwork, thermostats, and control systems inside the building may qualify as part of an interior renovation. But external components like rooftop units, condensers, and chillers typically don't. A cost segregation study can help you sort this out properly.
What about mixed-use buildings? I'm looking at a building that has retail on the ground floor and apartments above.
Those can be tricky. The regulations around mixed-use properties are more complex because they're technically residential in part. If a portion of the building is dedicated solely to nonresidential use that portion may qualify. You'd need to work with a cost segregation specialist to properly allocate costs between the residential and nonresidential portions.
MACRS Property Classes Eligible for Bonus Depreciation
MACRS Class | Example Components | Bonus Eligible |
5-Year Property | Appliances, carpeting, cabinetry, countertops, decorative lighting, window treatments, specialty electrical serving equipment (not the building) | ✅ Yes - 100% |
7-Year Property | Office furniture, desks, workstations, specialty flooring, security systems, telecom equipment | ✅ Yes - 100% |
15-Year Property | Parking lots, sidewalks, landscaping, fencing, site lighting, drainage, retaining walls, signage | ✅ Yes - 100% |
Qualified Improvement Property (QIP) | Interior non-structural improvements to commercial buildings (drywall, interior doors, ceilings, interior finishes) | ✅ Yes - 100% |
27.5-Year Property | Residential rental building structure: framing, foundation, roof, exterior walls, windows, structural HVAC, plumbing rough-in | ❌ No |
39-Year Property | Commercial building structure: same structural components as residential, applied to non-residential real property | ❌ No |
The Qualification Process
You need to establish 3 things clearly:
1st,
that the building was already placed in service before you made the improvements. You need the original in-service date of the building.
2nd,
that you made the improvements after you acquired the property. Construction schedules, invoices, and payment records are critical here.
3rd,
that the improvements qualify under IRS rules, meaning they're interior, non-structural improvements to nonresidential property.
Strategic Considerations for 2026 and Beyond
Given that 100% bonus depreciation is now permanent, how should property owners think about timing their improvements?
That permanency actually gives you a lot of flexibility. Before the One Big Beautiful Bill Act, we were dealing with a phasedown schedule that was going to hit zero by 2027. That created artificial urgency, people were rushing to complete projects to capture higher depreciation percentages.
Now, you can plan your improvements based on what makes sense for your business, not just the tax calendar. That said, you still want to be strategic about the year you place property in service, especially if you have variable income years.
How does this interact with other tax planning strategies?
It's important to model this out with your CPA. Bonus depreciation can create net operating losses, which, for corporations, are limited to offsetting taxable income in future years. So if you're planning a major renovation, think about whether you want to take the full deduction in one year or potentially spread it out using Section 179 or electing out of bonus.
Also consider your state tax situation. Not all states conform to federal bonus depreciation rules, so you might face different tax treatment at the state level.
What about the Alternative Depreciation System? When would that come into play?
If you make what's called a Section 163(j) real estate election to avoid business interest expense limitations, you're required to use the Alternative Depreciation System. Under ADS, QIP is depreciated over 20 years instead of 15, and it becomes ineligible for bonus depreciation.
This is a trade-off decision. Some real estate businesses with significant debt prefer the Section 163(j) election to fully deduct interest expense, even though it means giving up bonus depreciation. Others prefer to keep bonus depreciation and work within the interest expense limitations.
There's no one-size-fits-all answer. It depends on your debt level, your interest expense, and your overall tax situation.
Partial Asset Dispositions = Complete the Strategy
I've heard something about partial asset dispositions. How does that fit into the QIP picture?
This is a strategy a lot of people overlook. When you renovate a space, you’re usually ripping out and replacing existing components (old lighting, flooring, or prior tenant improvements).
The IRS allows you to dispose of those retired components and take an immediate loss deduction for the remaining undepreciated basis.
For example, if you bought a building five years ago that included $100,000 of prior tenant improvements depreciated over 39 years, you may have taken about $13,000 in depreciation, leaving $87,000 still on the books. If those improvements are removed during a renovation, a Partial Asset Disposition (PAD) election allows you to write off that remaining $87,000.
At the same time, the cost of your new buildout may qualify as Qualified Improvement Property (QIP) and be eligible for bonus depreciation. So you’re accelerating deductions on both the old components being retired and the new improvements being placed in service.
How do you make that election?
It's done through your tax return, and you really want to work with a CPA on this because the documentation requirements are specific. You need to identify what was disposed of, establish its basis, calculate the remaining undepreciated amount, and make the formal election on your return.
But when done correctly, it can significantly increase your first-year deductions beyond just the new improvements.
Final Thoughts & Action Steps
For someone who's about to buy or lease their first commercial space, what's your top advice?
Three things:
Understand that QIP is a planning tool, not an afterthought. Before you even start your buildout, talk to a cost segregation specialist and a CPA who understands these rules. The decisions you make about what to improve, how to improve it, and when to place it in service can have huge tax implications.
Document everything. Keep detailed records of what existed when you bought or leased the property, what improvements you made, when construction started and finished, and what everything cost. If you ever face an IRS audit, your documentation is your defense.
Don't go it alone. The tax code is complex, and QIP rules have nuances. The difference between doing this right and doing it wrong can be hundreds of thousands of dollars. Invest in good professional help up front. A qualified cost segregation specialist and experienced CPA will more than pay for themselves in tax savings.
Any final thoughts on the recent legislative changes?
The One Big Beautiful Bill Act making 100% bonus depreciation permanent is huge. For years, we dealt with uncertainty—phasedowns, potential expirations, constant legislative changes. Now we have permanency, which means you can make long-term business decisions without worrying that the tax benefit will disappear.
If you're opening a commercial space, renovating a property, or expanding your operations, right now is an excellent time to move forward. The tax benefits are as good as they've ever been, and they're here to stay.
Just make sure you do it right. Work with professionals, document everything, and take advantage of what the tax code offers. QIP is one of those strategies worth looking into for commercial property owners.
Have questions about qualified improvement property and how it applies to your commercial real estate investments? Send me a message to learn how cost segregation and strategic tax planning can maximize your deductions and improve your cash flow.
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