Handle with Care: What Is and Is Not QIP

The CARES Act brought several changes that benefited real estate owners, but one provision stood out immediately — the retroactive correction of the recovery period for assets defined as Qualified Improvement Property (QIP) under the Tax Cuts and Jobs Act (TCJA). By assigning these assets a 15-year straight-line recovery period, they became eligible for bonus depreciation.

News of this change spread quickly, and with it came a wave of assumptions: if an interior space underwent a gut renovation on or after 1/1/2018, then all the associated spend must be QIP, and thus, must be bonus-eligible. Not quite.

At Capstan, we’ve heard this assumption often, and we urge clients to take a step back and carefully review the actual IRS definition of QIP before classifying assets.

QIP Defined: What Qualifies and What Doesn’t

QIP was initially defined under the PATH Act and refined in later legislation. As it stands under Section 168(k)(3), Qualified Improvement Property is:

Any improvement made by the taxpayer to the interior portion of a building that is nonresidential real property, if such improvement is placed-in-service after the building was first placed-in-service. 

Three key exclusions are baked into this definition. Expenditures for the following may not be classified as QIP:

1. The enlargement of a building
2. Installation of elevators or escalators
3. The internal structural framework of the building

Breaking Down the Definition

Interior Portion

Improvements made to a building’s exterior—like façades, roofing systems, or windows—are not QIP-eligible. The same applies to land improvements, which must be categorized and depreciated separately.

Nonresidential Property

QIP applies only to nonresidential real property. That means renovations to multi-family housing, apartments, or assisted living facilities do not qualify.

Real Property

Only real property assets may be classified as QIP.  5-year personal property is not QIP.  Sometimes confusion arises since both asset classes are bonus-eligible, but they must be treated separately.

No Enlargements

Any construction that increases a building’s footprint is not QIP. So, if a project includes both a renovation and an addition, only the improvements to the renovation may qualify as QIP.

What Is the Internal Structural Framework of the Building?

The internal structural framework of the building, as defined by the IRS, refers to load-bearing components essential to the building’s stability. This includes:

– Load-bearing walls
– Columns and girders
– Beams and trusses

These elements are specifically excluded from QIP eligibility. Improvements made to or involving these systems must be capitalized separately.

Is HVAC Considered Qualified Improvement Property (QIP)?

It depends. HVAC renovations often include a mix of eligible and ineligible components, and eligibility depends on the location of the asset in question:

– Internal assets like ductwork, thermostats, dampers, and control systems may qualify as QIP, as long as they’re part of an interior renovation

– External components like rooftop units, condensers, and chillers typically do not qualify

A comprehensive cost segregation study can help differentiate these components.

Qualified Improvement Property in 2024

As of 2024, QIP remains eligible for 60% bonus depreciation under the phase-out schedule established in the TCJA. This percentage is scheduled to continue declining in future years, but the “Big, Beautiful Bill” making its way through Congress may herald the return of 100% bonus depreciation for QIP and other eligible assets.

Why a Cost Segregation Study Matters

Even when assets aren’t eligible for QIP, they may still qualify for accelerated depreciation under other categories like Section 1245 personal property or land improvements. A cost segregation study ensures that:

– QIP is separated from personal property and structural components
– Each asset type is placed into the correct class life
– The taxpayer has full documentation to support any depreciation strategy

Quick QIP FAQs

Q: What is the internal structural framework of the building?
A: It includes structural elements like beams, columns, trusses, and load-bearing walls. These are not QIP-eligible.

Q: Is HVAC considered QIP?
A: Some interior components (e.g., ductwork) may qualify, but rooftop or exterior systems generally do not.

Q: What qualifies as QIP in 2024?
A: Interior, non-structural improvements to nonresidential real estate, placed in service after the building’s original service date. Bonus eligibility is 60% in 2024.

Most importantly, work with taxation experts to ensure that you are in compliance while we wait for further clarity. The IRS has heightened requirements to claim the R&D Tax Credit, and documentation is more important than ever. To ensure that your Credit is fully leveraged, amply supported, and completely defensible, it’s crucial to pick a team you can trust.