Qualified improvement property and cost segregation: What you need to know

In the commercial property world, there are many tax savings strategies available. So many that it’s easy to overlook really powerful ones. Qualified improvement property is an easy one to miss, but making certain improvements to your commercial properties can qualify you for extra depreciation deductions and tax savings.

Below, we’ll get into what qualified improvement property is and what you need to do to take maximum advantage of it.

 

What is a qualified improvement property?

 

Qualified improvement property (QIP) is a tax benefit that allows non-residential property owners to take accelerated depreciation on certain improvements to their property. These include improvements made to the building’s interior portion, but not the exterior.

However, certain interior improvements do not qualify for a QIP claim. These include elevators and escalators, any building enlargements, and improvements to the internal structural framework.

 

 

In order to claim a qualified improvement property, you must meet the following requirements:

  • The improvements were paid for by the taxpayer (i.e. the owner of the building)
  • The improvements were done to an interior portion of either a commercial, retail, or factory building. Residential properties do not qualify, however, hotels do since residents aren’t permanent.
  • The building must have already been in service after the improvements were made. New construction or complete rebuilds don’t count.

The CARES Act of 2020 assigned qualified improvement properties with a 15-year depreciation period. The made then qualify for bonus depreciation, and the act further increased the amount that property owners could take as a bonus (more below).

 

Qualified improvement properties and bonus depreciation

In most cases, qualified improvement property deductions are allowed to take bonus depreciation. This means that you can potentially take 100% of the depreciation deduction for the entire life of the property in the first year after the improvements are made.

If you haven’t already claimed them, you may be able to apply qualified property improvements from previous tax years and apply bonus depreciation. If you qualify for this, it could significantly increase your property’s cash flow through multiple years of bonus depreciation—to the point where you may even be getting a refund from the IRS.

Keep in mind that taking bonus depreciation on qualified property improvements (and on other property) doesn’t technically increase the amount of depreciation tax savings, it simply pushes more of it into one year. So, in future years you won’t have the same tax savings. However, the net present value of money means you can achieve more with it through compound interest the sooner you have it, so it always makes sense to take more tax savings upfront.

Both the Tax Cuts and Jobs Act of 2017 and the CARES Act of 2020 made changes to the amount of bonus depreciation you could take on qualified improvement properties. As of the latest changes, the bonus depreciation rate starts at 100% and is decreasing by 20% each year, starting in 2023.

You can see bonus depreciation rates for QIP below. Keep in mind that these are general rates, you will need to work with your CPA to ensure your actual QIP depreciation rates.

  • 100% bonus depreciation: QIP acquired after 9/27/17 and placed into service between 2018-2022
  • 80% bonus depreciation: QIP acquired after 9/27/17 and placed into service in 2023
  • 60% bonus depreciation: QIP acquired after 9/27/17 and placed into service in 2024
  • 40% bonus depreciation: QIP acquired after 9/27/17 and placed into service in 2025
  • 20% bonus depreciation: QIP acquired after 9/27/17 and placed into service in 2026

 

Why cost segregation matters for QIPs

 

 

Cost segregation studies are important for qualified improvement properties because they provide the information needed to properly take the claim. During a study, your CPA categorizes all of your eligible property components into different depreciation categories and periods. This process can help you determine what is eligible as QIP and what bonus depreciation you can take.

 

 

 

In addition, it can help you take accelerated depreciation for all of your property’s components and save on additional taxes on top of your QIPs. Even for smaller property owners, doing a cost segregation study can help you save a ton, and is a double benefit with a QIP and the bonus depreciation expenses it can provide.

 

Making cost segregation and QIP accessible to all property owners

At Commercial Property Refund, we love to help all property owners realize the maximum tax savings they can get for a reasonable price. That’s why we developed proprietary software that automates a significant portion of the cost segregation process. This allows your CPA to provide a cost segregation study much faster and for a lower price than a traditional study that requires expensive engineers to carefully measure every piece of your property. With proper estimations and our software, your CPA can cut the need for engineers on most properties.

 

See how much you can save

If you’re interested in learning how much you could save by taking accelerated depreciation through cost segregation, check out our free tax refund estimator. With just a few questions, you’ll get a reasonable estimate of your tax savings based on your property’s general characteristics.

About Author

Richard Bourgault

Graduating from Georgia Tech with a degree in Electrical Engineering, Richard has gained over a decade of expereince in Cost Segregation coupled with software UX.

0 0 votes
Article Rating
Subscribe
Notify of
guest
0 Comments
Inline Feedbacks
View all comments

Copyright © 2024 Commercial Property Refund. All Rights Reserved.