Yes, HVAC work generally counts as Qualified Improvement Property when it upgrades the interior of an existing nonresidential building. That classification matters because QIP has a 15-year depreciation life instead of 39, and under the One Big Beautiful Bill Act, QIP placed in service after January 19, 2025 is eligible for 100% bonus depreciation. In practice, an interior HVAC replacement in a commercial building you already own can often be written off in full the year it goes into service. The catches are in the details: not every part of an HVAC project qualifies, and the deduction method you choose changes what you owe when you sell.
What HVAC Has to Look Like to Qualify
Section 168(e)(6) sets three requirements for QIP. The improvement has to be to an interior portion of a nonresidential building. You have to be the one making and paying for it. And it has to be placed in service after the building itself was originally placed in service by any taxpayer.1Office of the Law Revision Counsel. 26 U.S. Code 168 – Accelerated Cost Recovery System
Three categories are excluded no matter how the invoice reads: work that enlarges the building, elevators and escalators, and changes to the internal structural framework. Residential rental property is out as well, since QIP applies only to nonresidential real property.1Office of the Law Revision Counsel. 26 U.S. Code 168 – Accelerated Cost Recovery System
Meet all of those tests and the HVAC work moves from the 39-year class that governs most nonresidential real property into the 15-year MACRS class.
Which HVAC Projects Actually Qualify
Interior HVAC work is the clean case. Replacing an air handler inside a commercial office, running new ductwork through a warehouse, upgrading thermostats and zone controls inside the building envelope — all of that improves the interior of an existing structure and fits the QIP definition.
Rooftop units are less clear. A rooftop condenser or packaged unit sits outside the building envelope, so it may not qualify as an improvement to the “interior portion” under the statute’s literal text. Some practitioners argue the unit serves interior climate and should count; others read physical location as controlling. The dispute matters for bonus depreciation on that specific component, though Section 179 often solves the problem separately.
New-construction HVAC never qualifies. Install HVAC in a new wing you’re adding to your warehouse and the whole cost falls into the enlargement exclusion, sending it to a 39-year life. Same for HVAC in a brand-new building, because there is no pre-existing structure for the improvement to follow.
Mixed projects need allocation. If a job replaces interior ductwork and an exterior condenser at the same time, the invoice should split labor and materials so the QIP-eligible portion gets the faster write-off and the rest is depreciated on its own schedule. Ask contractors up front for documentation that separates interior from exterior work.
What QIP Classification Is Worth in 2025 and After
For qualifying property acquired after January 19, 2025, the One Big Beautiful Bill Act provides a permanent 100% first-year depreciation deduction.2Internal Revenue Service. Treasury, IRS Issue Guidance on the Additional First Year Depreciation Deduction Amended as Part of the One Big Beautiful Bill An HVAC replacement that meets the QIP tests and is placed in service in 2026 can be deducted in full the year it’s completed, with no dollar ceiling. Bonus depreciation can even generate a net operating loss that carries into later years.
There is a narrow window at the front end. HVAC improvements placed in service between January 1 and January 19, 2025 still fall under the old phase-down schedule at 40%. After January 19, 2025, the 100% rate is available.2Internal Revenue Service. Treasury, IRS Issue Guidance on the Additional First Year Depreciation Deduction Amended as Part of the One Big Beautiful Bill
When Section 179 Handles What QIP Can’t
Congress separately named heating, ventilation, and air-conditioning property as “qualified real property” for Section 179 purposes, alongside roofs, fire protection, alarms, and security systems.3Office of the Law Revision Counsel. 26 U.S. Code 179 – Election to Expense Certain Depreciable Business Assets That coverage sits outside the QIP definition, which is why Section 179 can catch HVAC work the QIP interior-improvement rule leaves behind — a rooftop unit being the common example.
For tax years beginning in 2026, the maximum Section 179 deduction is $2,560,000, phasing out dollar-for-dollar once total qualifying property placed in service during the year exceeds $4,090,000.4Internal Revenue Service. Revenue Procedure 2025-32 Section 179 cannot create a net operating loss; the deduction is capped at the taxpayer’s taxable income from all active trades or businesses.
You can split a single project between the two. Elect Section 179 on part of the cost and apply bonus depreciation to the rest. For straightforward interior HVAC that qualifies as QIP, bonus depreciation is usually simpler because it has no dollar cap and no income limitation. Section 179 earns its place on components that fall outside the QIP definition.
The Recapture Cost You Feel at Sale
Full expensing in year one feels like a gift until you sell the building. Every dollar of depreciation is a potential tax bill on sale, and the method you used decides the rate.
QIP depreciated through bonus depreciation is Section 1250 property. On sale, that depreciation is recaptured at the unrecaptured Section 1250 gain rate, which tops out at 25%.
QIP expensed under Section 179 is treated as Section 1245 property, and the full depreciation is recaptured as ordinary income on sale.3Office of the Law Revision Counsel. 26 U.S. Code 179 – Election to Expense Certain Depreciable Business Assets With ordinary rates running above 37%, the spread is real. On a $200,000 HVAC system, the difference between 25% and 37% recapture is $24,000 in additional tax. Long-term holders who plan to sell should think twice before defaulting to Section 179 on work that qualifies for bonus.
The Section 163(j) Election That Turns Bonus Off
Real estate businesses with meaningful debt often elect to be treated as an electing real property trade or business under Section 163(j)(7)(B), which removes the 30% adjusted taxable income cap on business interest.
The cost is quiet but heavy. The election forces QIP onto the Alternative Depreciation System, stretching the recovery period from 15 years to 20 and using straight-line depreciation. ADS property is also ineligible for bonus depreciation. A $500,000 interior HVAC replacement that would otherwise be fully deductible in year one instead spreads across 20 equal years.
Whether it pays off depends on the size of your interest expense against your depreciable asset base. Businesses with large mortgages and small annual improvement budgets often come out ahead. Owners spending heavily on QIP-eligible work may lose more in bonus depreciation than they gain in interest deductions. The election is effectively permanent, so model both paths with real numbers before filing it.
Tenant-Paid HVAC
The deduction generally follows whoever pays for and owns the improvement. A commercial tenant who funds the HVAC work, isn’t reimbursed, and doesn’t have the payment treated as a substitute for rent is typically the owner of the improvement for tax purposes and claims the depreciation.
A tenant improvement allowance changes the picture. Cash from the landlord used to install HVAC is generally taxable income to the tenant, though the tenant then depreciates the improvements. Section 110 carves out a limited exception for qualifying short-term retail leases of 15 years or less where the improvements revert to the landlord at the end of the term; in that case, the landlord claims the depreciation.
Settle who captures the tax benefit in the lease itself, before the work starts. A tenant who pays out of pocket for a $300,000 system and takes 100% bonus in year one is in a very different position than one who accepts reimbursement and loses the write-off.
Reporting
Depreciation on QIP, including bonus depreciation and Section 179 elections, is reported on IRS Form 4562, which asks for property class, placed-in-service date, cost basis, and method for each asset or asset group.5Internal Revenue Service. About Form 4562, Depreciation and Amortization
Keep contractor invoices that separate interior from exterior work, name the building address and placed-in-service date, and confirm the project did not enlarge the structure. When costs are split between QIP and non-QIP components, the allocation should be traceable on the paperwork. Misclassifying a 39-year improvement as 15-year QIP accelerates a deduction by decades, which is exactly the kind of error the IRS looks for. Get it right and the payoff is equally sharp: a $400,000 interior HVAC replacement that qualifies as QIP and is fully deducted in year one produces a federal tax reduction north of $80,000 for a business in the 21% corporate bracket.