Qualified Leasehold Improvements were a pre-TCJA tax category for certain interior improvements made to nonresidential leased property. Put simply: a tenant, landlord or sublessor improved leased commercial space so the tenant could use it more effectively.
The category mattered because qualifying property could receive shorter depreciation treatment than standard 39-year nonresidential real property.
A key consideration was whether the improvement customized the interior space for tenant use rather than expanding the building itself or modifying structural components that fell outside the category’s requirements. Although Qualified Leasehold Improvements were eventually replaced by newer rules, they helped shape the framework used today when evaluating tenant improvements and determining the appropriate depreciation treatment under current QIP depreciation rules.
Historically, Qualified Leasehold Improvements had to be made to the interior portion of a building, under or pursuant to a lease, and placed in service more than three years after the building itself was first placed in service. The improvements also had to relate to nonresidential real property. Exterior improvements, building enlargements, elevators, escalators, structural framework and common-area improvements generally did not qualify.
A tenant improvement allowance may fund improvements, but the tax result depends on ownership, lease terms, capitalization, and whether the improvements meet the applicable statutory requirements.
Before the Tax Cuts and Jobs Act, qualifying leasehold improvements were generally eligible for 15-year recovery treatment, rather than the 39-year life that applies to most nonresidential real property. That shorter recovery period is why leasehold improvements depreciation became such a valuable planning area for businesses renovating leased space.
Depreciation Recapture should also be considered when improved property is sold or otherwise disposed of, because prior deductions may affect the tax treatment of gain.
Qualified Leasehold Improvements were narrower. They focused on leased commercial space and included requirements tied to the lease relationship and the three-year placed-in-service rule. Qualified Improvement Property is broader. QIP generally covers improvements made by the taxpayer to the interior of an existing nonresidential building after the building was first placed in service, excluding enlargements, elevators, escalators and internal structural framework.
The TCJA eliminated the separate Qualified Leasehold Improvement category and consolidated several improvement categories into QIP. Congress intended QIP to have a 15-year life, but a drafting error initially left QIP with a 39-year life. The CARES Act later corrected that error retroactively, assigning QIP a 15-year GDS life and 20-year ADS life for property placed in service after 2017.
Bonus Depreciation remains central to QIP planning because QIP’s corrected 15-year life generally makes it eligible property, subject to timing, elections and other limits.
The One Big Beautiful Bill Act restored 100% first-year additional depreciation for qualified property acquired, or otherwise meeting the applicable timing rules, after January 19, 2025, according to IRS guidance.
Qualified Leasehold Improvements generally included interior improvements to leased nonresidential space, such as walls, flooring, ceilings, lighting, plumbing, electrical work, and built-ins. Exterior improvements, structural components, elevators, escalators, and building expansions generally did not qualify.
Under the historical qualified leasehold improvement rules, the building generally had to be placed in service at least three years before the improvement was placed in service. The rule prevented taxpayers from treating original build-out or new construction costs as leasehold improvements.
No. Qualified Leasehold Improvements generally applied only to space occupied exclusively by the tenant. Improvements to shared areas, such as lobbies, hallways, stairwells, restrooms, and other common amenities, were typically excluded from this treatment.
The Tax Cuts and Jobs Act eliminated Qualified Leasehold Improvements as a separate category and replaced several improvement classifications with QIP. Taxpayers must still determine whether improvements meet the requirements for QIP treatment.
Certain improvements to nonresidential real property may qualify for Section 179 expensing if statutory requirements are met. For tax years beginning in 2025, IRS Publication 946 lists a $2.5 million maximum Section 179 deduction, reduced when total qualifying property placed in service exceeds $4 million. Eligibility depends on the asset, timing, taxpayer elections and taxable income limits.
For more than four decades, Bennett Thrasher has provided businesses and individuals with strategic business guidance and solutions through professional tax, audit, advisory, and business process outsourcing services. Contact Trey Webb, partner in charge of Bennett Thrasher’s Real Estate and Hospitality Tax Group, or call us at 770.396.2200
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