Handle With Care: What Is And What Is Not QIP

The CARES Act ushered in several changes that had a positive impact on real estate owners.  One provision that had a huge immediate impact was the retroactive correction of the recovery period for assets defined as Qualified Improvement Property (QIP) under the TCJA.  By defining the recovery period of these assets as 15-year straight line, they become eligible for the TCJA 100% bonus provision.  Many people heard this news and assumed that all post-TCJA interior improvements can be designated as QIP and therefore receive 100% bonus.  In other words, people think that if an interior space underwent a gut renovation on or after 1/1/2018, all associated spend can be designated as QIP.

We here at Capstan have heard this line of thinking quite a bit lately, and we caution our clients to step back and review the definition of TCJA-QIP before making any assumptions.  It cannot be assumed that all improvements made on after 1/1/2018 automatically qualify as TCJA-QIP.  There are several nuances that need to be considered.

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QIP Revisited: Five Years Of Qualified Improvement Property

Qualified Improvement Property (QIP) was introduced to the federal tax code via the PATH Act of December 2015. Initially, QIP was conceived as a vehicle by which base building assets might become eligible for bonus depreciation when an existing building was improved.  In the last five years however, QIP has evolved into a core strategy for improvement work to commercial real estate.

As is the case with many tax strategies, QIP has a number of important details that must be kept in mind.  Let us start with the definition, as outlined under the PATH Act:

Any improvement to an interior portion of a building which is nonresidential real property if the improvement is placed-in-service after the date the building was first placed-in-service by any taxpayer. Exclusions also exist for any work done to elevator, escalator equipment, enlargements of a building or work to structural members of a building.

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