QIP and Partial Asset Disposition. The Double Deduction Most Owners Miss.

Last year I bought a commercial building and gutted it. New roof, new flooring, new HVAC: a full renovation. When it came time to look at the tax side, I wanted to claim QIP on everything going in and a Partial Asset Disposition on everything coming out.

Then I hit the same wall most owners hit: to write off the old components, you need to know their original cost basis. The building came to me as a single purchase price. Nobody had ever broken out what the HVAC was worth separately from the roof or the flooring. It was all just "the building."

That is the gap. And it is the reason a cost segregation study is not just about accelerating depreciation on what you buy. It is the foundation you need to claim every deduction available when you eventually renovate.

When you renovate a commercial property, you already know you are spending money. What most owners do not know is that the tax code gives you two separate ways to take it back. Not one. Two.

The first is Qualified Improvement Property. It allows you to accelerate the depreciation on everything new you put in.

The second is a Partial Asset Disposition. It allows you to write off everything old you threw out.

Used together, they can turn a $200,000 renovation into more than $250,000 in first-year tax deductions. Most owners claim neither. Not because they do not qualify. Because they did not know to ask.

What is Qualified Improvement Property?

Qualified Improvement Property, or QIP, is defined under IRC Section 168(e)(6). It covers any improvement made to the interior of a nonresidential commercial building that was already placed in service. The improvement has to be made by the taxpayer — it cannot be original construction — and it cannot be an enlargement of the building, an elevator or escalator, or a change to the building's internal structural framework.

Everything else that happens inside the building qualifies. New flooring. Updated lighting. A replaced HVAC system. Renovated bathrooms. A complete tenant buildout. All of it is QIP.

Here is why that matters.

Without the QIP designation, interior improvements to a commercial building depreciate over 39 years. That is the default. You spend $200,000 on a renovation in 2026 and the IRS gives you roughly $5,100 per year in deductions for the next 39 years.

With QIP, those same improvements become 15-year property. And 15-year property is eligible for bonus depreciation.

Under the current rules, that means potentially 100% of the cost in year one.

A brief history: this almost did not exist

QIP has not always been this straightforward. The Tax Cuts and Jobs Act of 2017 was supposed to create QIP and give it a 15-year life with bonus depreciation eligibility. But a drafting error in the final bill accidentally assigned it a 39-year life instead, which made it ineligible for bonus depreciation entirely.

For two years, QIP existed on paper but delivered almost none of its intended benefit.

The CARES Act of 2020 fixed the error — retroactively to January 1, 2018. If you made qualifying improvements between 2018 and 2020 and did not capture the QIP treatment, you may still be able to go back and claim what you missed without amending prior returns.

What is a Partial Asset Disposition?

A Partial Asset Disposition, or PAD, is a tax election under Treasury Regulation 1.168(i)-8. It addresses a problem that most property owners do not realize they have.

When you replace a component of a building — the HVAC system, the roof, the flooring, the electrical panels — the old component does not disappear from your tax records. If it was part of the original building basis, it is still sitting on your depreciation schedule, generating a tiny annual deduction, even though you demolished it and hauled it away.

The PAD election lets you stop that. You recognize the disposed component as a loss in the year of disposition and write off its entire remaining depreciable basis at once.

That means the year you replace your HVAC system, you do not just get deductions for the new equipment. You also get a loss deduction for whatever undepreciated basis remained in the old equipment. You stop depreciating something that no longer exists, and you take the write-off today.

How they work together

QIP and PAD are addressing opposite ends of the same renovation. QIP accelerates deductions on what you put in. PAD captures deductions on what you took out. In the same tax year, you can claim both.

Here is a concrete example. You own a retail center. You replace the HVAC system entirely. The new system costs $150,000. The old system had an original cost of $85,000 and $52,000 of undepreciated basis remaining.

With QIP and PAD:

• New HVAC → QIP → 100% bonus depreciation → $150,000 deduction
• Old HVAC → PAD election → write off remaining basis → $52,000 deduction
• Total year-one deductions from one HVAC replacement: $202,000

Without these elections:

• New HVAC depreciates over 39 years → approximately $3,800 per year
• Old HVAC keeps depreciating at its existing rate, never fully written off
• Year-one benefit from the same project: roughly $3,800

Same renovation. Same property. Same tax code.

$202,000 versus $3,800.

The catch: you need the numbers

The PAD election requires you to know the original cost of the component being disposed of. That sounds simple. In practice, it rarely is.

If your building was acquired years ago as a single purchase, the entire cost was likely recorded as one line item. Nobody itemized the HVAC, the flooring, the roof, and the electrical separately. They were all just part of the building, depreciating at 39 years.

Without that component-level breakdown, you cannot support the PAD election. You cannot write off a basis you cannot identify.

This is exactly what a cost segregation study solves. A study done at acquisition creates a component-by-component record of your building. Every asset, its original cost, its assigned depreciation class. That record becomes the foundation for every PAD election you make on future renovations.

If you did not get a cost seg study at acquisition, a retroactive lookback study can reconstruct that component detail from historical records, blueprints, and engineering analysis. Under IRS guidance, you can implement the lookback findings without amending prior returns by filing a Form 3115 — a change in accounting method. And that lookback also gives you the basis documentation you need to support PAD elections going forward.

If you did not act in those first 90 days after acquisition, a lookback study can still reconstruct what you need — without amending prior returns.

PAD elections on prior-year disposals you already missed can also be claimed. If you replaced your roof three years ago and never recognized a loss on the old roof, a Form 3115 can capture that missed deduction in the current year. It does not require going back and reopening old returns.

Who should be looking at this?

Any owner of nonresidential commercial real estate who has made, is making, or is planning any interior improvements. That includes tenant buildouts, system replacements, remodeling, and any renovation work that removes existing building components.

It also includes owners who have made improvements in prior years and never claimed QIP treatment or PAD elections. The window to recover those deductions is not necessarily closed.

The more renovation activity a property has seen, the more likely there are PAD opportunities sitting unclaimed on the depreciation schedule.

What to do next

The first step is knowing what your renovation is actually worth on paper. Not just the contractor invoice. The tax value — what you can deduct, in what year, and what the old components are worth as a write-off.

We do that analysis. You give us the property basics, we run the numbers, and we show you what QIP and PAD could put back in your pocket. No phone call required. No commitment. Just the answer.