Qualified Improvement Property (QIP): What It Is and How It Affects Your STR Deductions

When you renovate or improve a rental property you already own, the tax treatment depends on what type of improvement it is. Some renovations qualify as Qualified Improvement Property — a special MACRS category that provides 15-year depreciation treatment and full bonus depreciation eligibility. Understanding QIP can significantly accelerate the tax benefit from renovation spending.

What Is Qualified Improvement Property?

QIP is defined under IRC §168(e)(6) as any improvement made by a taxpayer to an interior portion of a nonresidential building that is already placed in service. Three conditions must be met: (1) the improvement is to the interior of the building — exterior improvements don't qualify; (2) the building must be nonresidential real property (this is a critical limitation for most STR investors); and (3) the improvement must be made after the building was first placed in service.

The CARES Act Fix: From 39-Year to 15-Year Treatment

QIP has a complicated legislative history. The Tax Cuts and Jobs Act (2017) was supposed to give QIP 15-year MACRS treatment and bonus depreciation eligibility. Due to a drafting error, the TCJA inadvertently assigned QIP to 39-year property — making it ineligible for bonus depreciation. This was a significant unintended consequence for real estate investors.

The CARES Act (2020) retroactively corrected the error, assigning QIP a 15-year recovery period under GDS and making it eligible for 100% bonus depreciation retroactively back to the TCJA's effective date (after September 27, 2017). Investors who had placed qualifying improvements in service in 2018 or 2019 could file amended returns or Form 3115 to capture the corrected treatment.

How QIP Principles Apply to STR Renovations

Even though most STRs are residential (technically outside the QIP definition), the economic principles apply to how a cost segregation study handles renovation costs. When you improve a residential STR — new flooring, kitchen remodel, bathroom renovation, fresh exterior — cost seg engineers analyze what was replaced and what was newly installed.

Interior improvements to an existing STR are analyzed for reclassification into 5-year personal property and 15-year land improvements. Flooring is examined for whether it's removable (5-year) or permanently bonded (27.5-year). Lighting fixtures, cabinetry that serves display functions, and decorative millwork may be argued as personal property. The overall effect is similar to QIP treatment — accelerated depreciation on renovation spending.

The Partial Asset Disposition Election

When you renovate an STR and replace existing components — a new roof, new HVAC, new kitchen — you may be able to deduct the remaining unrecovered basis of what you replaced rather than continuing to depreciate it. This is the partial asset disposition (PAD) election under Reg. §1.168(i)-8.

A cost segregation study done at the time of renovation can identify the original cost of components being replaced (using engineering estimating techniques) and calculate the remaining tax basis. Disposing of those components at replacement deducts that basis immediately — a benefit that compounds the accelerated depreciation on the new improvements.

Timing Strategy: When to Commission a Cost Seg Study on Renovations

For maximum benefit, commission a cost segregation study in the same tax year as a major renovation. The study captures both the new improvements for accelerated classification and the disposed-of components for PAD. Waiting to commission the study in a later year means you may miss the PAD opportunity and potentially face a look-back study (Form 3115) for the renovation costs.

• Year of acquisition with renovation: Best time — cost seg covers original acquisition + renovation in one study
• Year of renovation on an existing property: Commission cost seg at renovation time to capture PAD and new component classifications
• Years after renovation: Form 3115 look-back study can capture missed deductions retroactively, but PAD may be lost