This article was written by Kyle R. Young, CCSP
Qualified Improvement Property (QIP) provides more immediate deductions and tax savings for real estate owners. If you are looking to better understand QIP and how you may benefit from it, this article is for you.
What is Qualified Improvement Property?
Qualified Improvement Property refers to any improvement made by a taxpayer to an interior portion of a non-residential building (i.e., commercial building) that has previously been depreciated. These improvements can include assets that are typically depreciated over 39 years:
- Drywall
- Acoustical ceilings
- Interior doors
- Plumbing
- Fire protection systems
- Electrical systems
What is Not Qualified Improvement Property?
QIP does not include improvements related to the internal structural framework of the building, elevators or escalators, building additions, and exterior improvements. These improvements can generally include:
- Structural framing
- Exterior doors & windows
- Roofing
- Exterior HVAC units
- Landscaping
Bonus Depreciation on QIP
Bonus depreciation allows businesses to immediately deduct a percentage of the cost of eligible property in the year it is placed in service. The Tax Cuts and Jobs Act (TCJA) and the CARES Act made substantial changes to the treatment of QIP. Qualified improvements placed in service after December 31, 2017, are depreciated over 15 years, making these improvements eligible for Bonus depreciation.
QIP placed in service from 2018-2022 receives 100% Bonus depreciation, allowing for the full cost of these improvements to be deducted in the first year. The Bonus depreciation rate phases down to 80% for qualified improvements placed in service in 2023 & 60% for qualified improvements placed in service in 2024.
The Bonus depreciation rate is currently set to continue phasing down 20% each year through 2026. Potential legislative changes that could occur that would bring back 100% Bonus depreciation.
Practical Considerations
Navigating QIP regulations can be tricky, so please keep the below items in mind:
- It is important to maintain detailed records of improvement projects so qualified improvement property can be identified and correctly classified. A lump sum of improvements should not be classified as QIP without reviewing the construction & cost detail to identify items that are not eligible for QIP treatment.
- A Tenant Allowance does not, by definition, meet the QIP requirements. As discussed above, the actual costs incurred by the tenant need to be reviewed.
- To classify improvements as QIP, the building itself must have been previously depreciated – by anyone in the past.
- There are other tax savings ideas that can be applied to a QIP – for example, potentially §179 can be taken instead of Bonus. Be conscious of the §179 hurdles.
- If §163(j) Real Estate election is made, QIP’s depreciable life is 20 years, not 15. This election would make QIP ineligible for Bonus depreciation.
- Don’t forget about Partial Asset Dispositions! The IRS gives preferential tax treatment to dispositions through the Tangible Property Regulations – helping you further maximize the available tax deductions!
Potential Opportunities for a QIP Study
- Hotels and restaurants undergoing a face lift
- Car dealerships going through rebranding
- Office and retail properties with new tenants
- Taxpayers remodeling their own buildings
MS Consultants Can Help
Qualified Improvement Property offers substantial tax benefits, but understanding and applying the rules correctly is essential. MS Consultant’s expertise in cost segregation and QIP can help real estate owners maximize these benefits while complying with the regulations. We complete over 1,500 studies a year and are the cost segregation firm of choice for hundreds of CPAs across the country.
MSC is committed to keeping clients informed about tax law changes and the impact these changes could have—stay tuned as we follow potential changes to Bonus depreciation rates and sunsetting tax policies.
Join us for a discussion of critical tax topics and tax saving opportunities for real estate clients in our Certified Real Estate Accounting & Tax Experts (CREATE) series.
If you have any questions or are interested in learning how you can maximize your tax deductions, don’t hesitate to reach out today to get started!