Leasehold improvements that qualify as Qualified Improvement Property (QIP) are depreciated over 15 years under MACRS, using straight-line depreciation and the half-year convention. Improvements that don’t fit the QIP definition get folded into the building and depreciated over 39 years instead. In practice, most tenants and landlords never actually spread the deduction across 15 years, because bonus depreciation and Section 179 expensing usually let them write off the full cost in the first year.
What Gets the 15-Year Period
The 15-year recovery period applies to Qualified Improvement Property, which the tax code defines as any improvement made by the taxpayer to the interior of a nonresidential building, placed in service after the building itself was first placed in service.1Office of the Law Revision Counsel. 26 U.S. Code 168 – Accelerated Cost Recovery System Build-out costs baked into a brand-new building don’t qualify. Only later modifications do.
Typical QIP includes new partition walls, dropped ceilings, updated electrical wiring, plumbing for a break room, and interior lighting. These are the changes a tenant makes to turn raw commercial space into a working office, restaurant, or store.
The depreciation method is straight-line, so the deduction is spread evenly across the recovery period. The half-year convention treats the improvement as placed in service at the midpoint of the year no matter the actual date, which means the first and last years produce half-sized deductions and the full schedule stretches across 16 tax returns.
One point that confuses tenants: the 15-year period has nothing to do with your lease term. A tenant on a five-year lease depreciates QIP over 15 years the same way a tenant on a twenty-year lease does. Older rules that tied depreciation to the remaining lease term no longer apply.
When It’s 39 Years Instead
Three categories of interior work are specifically excluded from QIP even though they happen inside the building:
- Building enlargements that add square footage or expand the footprint
- Elevators and escalators
- Internal structural framework, including load-bearing walls, columns, and structural supports
These excluded items depreciate over 39 years as part of the building, using straight-line with a mid-month convention.1Office of the Law Revision Counsel. 26 U.S. Code 168 – Accelerated Cost Recovery System Exterior work — a new roof, facade upgrades, parking lot improvements — falls outside QIP as well and follows the same 39-year schedule. On any significant renovation, the difference between 15 years and 39 years makes accurate classification worth the effort.
Writing It Off in Year One
Because QIP has a recovery period of 20 years or less, it qualifies for bonus depreciation. That flips the practical answer: instead of stretching the deduction across 15 years, most taxpayers deduct the full cost the year the improvement goes into service.
100% Bonus Depreciation
The One, Big, Beautiful Bill permanently restored the 100% first-year depreciation deduction for qualified property acquired and placed in service after January 19, 2025.2Internal Revenue Service. Treasury, IRS Issue Guidance on the Additional First Year Depreciation Deduction Amended as Part of the One Big Beautiful Bill QIP placed in service in 2026 and beyond gets a full 100% write-off with no scheduled phase-down.
For property placed in service under the earlier TCJA phase-down, the older percentages still apply: 80% in 2023, 60% in 2024, and 40% for property placed in service between January 1 and January 19, 2025. Taxpayers who missed the higher rates in those years can’t go back and claim the permanent 100% rate for property already in service before January 20, 2025.
Bonus depreciation is automatic unless you opt out. A taxpayer who prefers to spread deductions across the full 15-year period can elect out by attaching a statement to Form 4562 by the due date (including extensions) of the return for the year the property is placed in service. The election applies to every asset in the same MACRS class placed in service that year, not just one project.3Internal Revenue Service. Additional First Year Depreciation Deduction (Bonus) – FAQ
Section 179 Expensing
Section 179 offers a similar year-one write-off with different limits.4Internal Revenue Service. Publication 946 – How To Depreciate Property For 2026, the maximum Section 179 deduction is $2,560,000. That limit phases out dollar-for-dollar once total qualifying property placed in service during the year exceeds $4,090,000 and disappears at $6,650,000. The thresholds adjust annually for inflation.
Section 179 also reaches items that QIP alone doesn’t cover. When elected for qualified real property, it extends to roofs, HVAC systems, fire protection and alarm systems, and security systems installed after the building was first placed in service.4Internal Revenue Service. Publication 946 – How To Depreciate Property
The important operational limit: a Section 179 deduction can reduce taxable income to zero but can’t create or increase a net operating loss. Unused amounts carry forward. Bonus depreciation has no such cap, which makes it the stronger tool for large projects in low-income years.
When You’re Stuck With 20 Years
Some taxpayers can’t use the standard 15-year MACRS schedule and instead must depreciate QIP under the Alternative Depreciation System, which assigns QIP a 20-year recovery period and blocks bonus depreciation entirely.
The most common trigger is the Section 163(j) election. A business classified as a real property trade or business can elect out of the cap on business interest expense deductions, but the trade-off is that all real property, including QIP, must then be depreciated under ADS.1Office of the Law Revision Counsel. 26 U.S. Code 168 – Accelerated Cost Recovery System For a heavily leveraged landlord, unlimited interest deductions may outweigh the five-year depreciation advantage. Tax-exempt use property and property used predominantly outside the United States also require ADS.
What Happens If the Lease Ends Early
When a lease terminates before QIP is fully depreciated, the remaining basis doesn’t just disappear. The party that paid for the improvements — usually the tenant — can claim the leftover amount as a loss in the year the improvements are permanently retired from service.
If the improvements are abandoned at lease-end (ripped out, left behind, or otherwise permanently retired), the remaining adjusted basis is deductible as an ordinary loss reported on Form 4797, Part II, line 10.5Internal Revenue Service. 2025 Instructions for Form 4797 Ordinary loss treatment offsets all types of income without the annual caps that apply to capital losses. To claim it, you need documentation that the improvements were actually retired: a lease clause confirming no right or obligation to remove them, plus evidence the space was surrendered. The loss is available only in the tax year the improvements are permanently taken out of service, not when the lease was signed or when you stopped using the space.
If the improvements are sold or transferred to the landlord for payment, the transaction produces a gain or loss equal to the sale price minus the remaining adjusted basis. QIP is Section 1250 property, so gain attributable to prior depreciation is subject to recapture. Under straight-line depreciation, that portion is generally taxed at the unrecaptured Section 1250 gain rate of 25%. If improvements are handed to the landlord at no cost, the tenant claims the abandonment loss and the landlord may recognize taxable income equal to the fair market value of what they received.
The Bottom Line on Timing
The formal recovery period for qualifying interior improvements is 15 years, and it’s still what makes those improvements eligible for the faster options. But for a commercial build-out placed in service in 2026, the combination of 100% bonus depreciation on QIP and Section 179 on qualifying building systems means the entire interior renovation cost can usually be deducted in year one. Improvements that fall outside the QIP definition — structural work, enlargements, elevators, escalators, and exterior projects — depreciate over 39 years, and taxpayers on ADS depreciate QIP over 20 years without bonus depreciation.