What Is Qualified Improvement Property (QIP)?

Qualified Improvement Property (QIP) is a category of building improvements established by the PATH Act of 2015. QIP was intentionally given a broad definition, removing many of the restrictions associated with other improvement categories of the time, such as Qualified Leasehold Improvements and Qualified Retail Improvements. 

However, the broad definition has led to some confusion, with many taxpayers assuming that any improvements may be designated as QIP. This is not the case, and taxpayers should consider their available options for an analysis that leverages the strategy by reviewing the improvements to determine what, in fact, are eligible assets.

Brief History of QIP

The Tax Cuts and Jobs Act (TCJA) of 2017 eliminated the other improvement categories, consolidating them under the broad umbrella of Qualified Improvement Property (QIP). QIP was intended to have a 15-year class life, but a drafting error complicated matters, leaving the status of QIP unclear. The error was corrected retroactively by the CARES Act of 2020, and QIPs placed in service after December 31, 2017, were officially assigned a 15-year depreciable life.

The significance of the shorter life is immediately apparent – bonus-eligible assets must have depreciable lives of 20 years or less. With the correction of the drafting error, QIP became eligible for bonus depreciation – which was 100% at the time. By reverting QIP to a bonus-eligible asset, many taxpayers suddenly looked back at prior renovations to take advantage of potential deductions – whether they were truly eligible or not.

It’s important to note, if the taxpayer elects to treat the property as a real property trade or business, QIP must be treated as a 20-year ADS and is not eligible for bonus depreciation.

Key Definitions and Eligibility Criteria for QIP

To understand which assets are qualified for QIP treatment and which are not, one needs to examine the definition further.

Since its inception under the PATH Act, QIP has been defined as:

Any improvement made by the taxpayer to an interior portion of an existing building that is nonresidential real property as long as that improvement is placed in service after the building was first placed in service by any taxpayer (Section 168(k)(3)). QIP specifically excludes expenditures for (1) the enlargement of a building, (2) elevators or escalators, and (3) the internal structural framework of a building.

QIP Exclusions

Let’s examine some key parts of this definition to determine which assets are not QIP-eligible:

Interior portion 

• Improvements to the exterior of a building, including the façade, roof, windows, doors, etc., are not eligible.
• Land improvements are not QIP-eligible.

Existing building

• Newly constructed buildings are not eligible for QIP treatment.
• If a newly constructed building is owner-occupied, and the building and improvements are placed in service simultaneously, those improvements are not eligible for QIP. 
• However, if the core and shell are placed in service by the owner, and at some later time, tenants lease space in the building, any spend for tenant improvements wouldbe eligible for QIP.

Nonresidential

• Improvements to a residential facility, multifamily property, or nursing home are not eligible for QIP.
• What about a mixed-use building? An income test is required. If more than 80% of the building’s income comes from residential sources, then the building is considered residential property, and improvements would not be QIP-eligible.

Real property

• 1245 personal property, such as 5-year class life assets, are not QIP-eligible.

Enlargement

• Any spend on expanding outside the original footprint of the building, including vertical, is not QIP-eligible.
• What about a combination expansion along with a renovation of the current space? QIP may be taken on the renovation portion of the project but not on the addition portion.

Structural framework

• Load-bearing walls, columns, girders, etc. are not QIP-eligible.

Other QIP Eligibility Considerations

A few other things to keep in mind:

• Some parts of a building system may be classified as QIP, while other parts may not. For example, in an HVAC renovation, the ductwork and control systems within the building may be considered QIP, but the external systems, including rooftop units, would not qualify.
• QIP is primarily useful in scenarios where the current owner renovates his property. In an acquisition scenario, a new owner is not permitted to take QIP on improvements made by the previous owner.

Leveraging Cost Segregation Studies for QIP Optimization

A quality cost segregation study is key to leveraging QIP, as it provides the comprehensive data analysis required to categorize assets into their appropriate asset classes and quantify their proper cost values.

Although not all improvements can be classified as Qualified Improvement, a cost segregation study is a powerful tool for properly allocating QIP, personal property, land improvements, and base building assets, thereby maximizing tax savings while maintaining defensibility. 

Unlock Your Property's Tax Savings Potential

Navigating the complexities of Qualified Improvement Property and maximizing your tax benefits requires professional guidance. Don't leave potential deductions on the table. A professional cost segregation study can provide the clarity and accuracy needed to optimize your tax strategy and maintain compliance. Contact our team today using the form below.