Mon - Fri: 9:00am - 5:00pm

Tax Implications of Selling Qualified Improvement Property (QIP)

Written by Coach Janelle CPA on March 16, 2024

You need to think about the sale of your rental property when you claim depreciation on your qualified improvement property (QIP).

Gains may be subject to higher-than-expected tax rates due to Section 1245 and Section 1250 ordinary income recapture and other factors. Planning your depreciation methods can significantly impact your current tax liabilities and long-term taxable gains when you sell.

Do you own or are you thinking of owning an office building, a store, a warehouse, or a factory building?

Are you thinking of making improvements to the interior of this building?

If you make improvements to the interior that the tax law classifies as QIP, your commercial property now has three property components:

   1. Land (non-depreciable)
   2. Building (depreciated over 39 years using the straight-line method)
   3. QIP (depreciated over 15 years using the straight-line method, but alternatively
   eligible for Section 179 expensing and bonus depreciation)

Technically, QIP means any improvement to an interior portion of a non-residential building (think offices, stores, factories, etc.) that is placed in service after the date the building is placed in service.

The exceptions are costs attributable to the enlargement of the building, any elevator or escalator, or the building’s internal structural framework.

QIP Deduction Choices

QIP is 15-year property eligible for deduction in three ways:

   1. Straight-line depreciation using the IRS 15-year depreciation table
   2. Section 179 expensing
   3. Bonus depreciation (technically called “additional first-year depreciation” in the tax code)

You can use a combination of the above to deduct your QIP—except when bonus depreciation is 100 percent, because that uses 100 percent of your basis in the QIP.

Bonus Depreciation

Lawmakers are in the process of reinstating 100 percent bonus depreciation for 2022 and 2023.

Regardless of the bonus deduction percentage—60 percent, 80 percent, or 100 percent—the rules for taxing that deduction when you sell are the same.

The reason to claim the deduction is that it’s immediate. For example, let’s say you spend $120,000 on QIP. With 100 percent bonus depreciation, you deduct $120,000 the year you place the QIP in service.

Caution. Make sure the passive loss rules don’t limit the QIP bonus depreciation deduction.

When you sell the building that contained the QIP for which first-year bonus depreciation was claimed, gain—up to the excess of the bonus depreciation deduction over the depreciation calculated using the straight-line method—is considered additional depreciation for purposes of Section 1250 and is high-taxed ordinary income recapture.

Section 179 Expensing

When you sell QIP for which first-year Section 179 deductions were claimed, gain up to the amount of the Section 179 deductions is high-taxed Section 1245 ordinary income recapture.

Straight-Line Depreciation

If you opt for straight-line depreciation for real property, including QIP (that is, no first-year Section 179 deductions and no bonus depreciation), there won’t be any Section 1245 or Section 1250 ordinary income recapture.
Instead, you will have only unrecaptured Section 1250 gain from the depreciation, and that gain will be taxed at a federal rate of no more than 25 percent.

Planning for the QIP Deductions

As you see above, your QIP deduction is not what it appears on the surface. Regardless of how you deduct your QIP, immediately or over time, you have a deduction that turns into taxable income at the time of sale.

So, what to do? If you want the big deduction in the first year, go for it, but
make sure you will realize that deduction—in other words, make sure the passive-loss rules don’t deny or defer that deduction; and
make sure you consider what is going to happen in the year you plan to sell the property.

Ready to optimize your tax planning for rental property sales and qualified improvement property (QIP) depreciation? Partner with Coach Janelle CPA today! Whether you're a current property owner or planning to invest, our tailored tax strategies can minimize your tax liabilities and maximize your gains. Don't navigate complex tax laws alone—schedule your consultation now and secure your financial future!

About Coach Janelle CPA

My passion is to help 6 & 7- figure+ earners see their financial possibilities through financial literacy and strategy. 

I want to help you save on taxes so you can keep more of your money to live the life you dream of and have worked for NOW, and build wealth and equity for the next generation.

Sign Up To Our Weekly Newsletter

Get the latest tax planning tips content delivered straight to your inbox.

 All Your Information is Protected When You Sign Up

Check Out Some Of Our Latest Blog Post

The IRS Annual Dirty Dozen List

Written by Coach Janelle CPA on March 11, 2024

Have you heard about the enormous tax savings you can reap by investing in a Maltese individual retirement arrangement or utilizing Puerto Rican captive insurance for your business? Before you invest your hard-earned money in these or other highly promoted tax schemes, you should check the IRS Dirty Dozen list...

Estimated Tax Penalties

Written by Coach Janelle CPA on March 2, 2024

The United States has a “pay as you go” tax system in which payments for income tax (and, where applicable, Social Security and Medicare taxes) must be made to the IRS throughout the year as income is earned, whether through withholding, by making estimated tax payments, or both.

New 1099-K Filing Rules Delayed Again

Written by Coach Janelle CPA on January 27, 2024

Do you sell goods or services and receive payment through a third-party settlement organization (TPSO)? If so, you must know the IRS’s new Form 1099-K reporting rules.
TPSOs include: 1, payment apps such as PayPal, CashApp, and Venmo; 2. online auction or marketplace services such as eBay and Amazon...

2023 Last-Minute Vehicle Purchases to Save on Taxes

Written by Coach Janelle CPA on December 13, 2023

Here’s an easy question: Do you need more 2023 tax deductions? If the answer is yes, continue reading. Next easy question: do you need a replacement business vehicle? If so, you can simultaneously solve or mitigate the first problem (needing more deductions) and the second problem...

Last-Minute Year-End Retirement Deductions 

Written by Coach Janelle CPA on December 8, 2023

The clock continues to tick. Your retirement is one year closer. You have time before December 31 to take steps that will help you fund the retirement you desire. Here are five things to consider. 1. Establish Your 2023 Retirement Plan. First, a question: do you have your (or your corporation’s) retirement plan in place? If not, and if you have some cash...

Last-Minute Year-End Medical Plan Strategies

Written by Coach Janelle CPA on December 6, 2023

All small-business owners with one to 49 employees should have a medical plan for their business. Sure, it’s true that with 49 or fewer employees, the tax law does not require you to have a plan, but you should. When you have 49 or fewer employees, most medical plan tax rules are straightforward...

Last-Minute Year-End General Business Income Tax Deductions

Written by Coach Janelle CPA on November 25, 2023

The purpose of this article is to reveal how you can get the IRS to owe you money.
Of course, the IRS will not likely cut you a check for this money (although in the right circumstances, that will happen), but you’ll realize the cash when you pay less in taxes...

Tax-Free Rental Income with the Augusta Rule

Written by Coach Janelle CPA on November 1, 2023

The Augusta rule gets its name from the Masters Golf Tournament, where some members and others who live in the area receive tax-free rent by renting their homes for a week or two. You don’t have to live in Augusta to benefit from this rule...

Deduct Travel by Car, Train, Plane, or Boat

Written by Coach Janelle CPA on October 25, 2023

Say you are going to travel from your home in Washington, D.C., to San Francisco. Will the tax law allow you to travel to San Francisco by car, train, plane, or boat, your choice? Answer. Yes. But special rules apply. You need to know these rules to guarantee your deductions...

Donating Clothing to Goodwill and the Salvation Army

Written by Coach Janelle CPA on October 18, 2023

As the year comes to a close, many taxpayers consider making clothing and household item donations both to give back and to optimize their tax deductions. Recent cases, like the one involving Duncan Bass, underscore the significance of understanding and adhering to IRS regulations related to these contributions...

Act Now! Get Your Safe-Harbor Expensing in Place

Written by Coach Janelle CPA on September 27, 2023

For 2024, you can elect the de minimis safe harbor to expense assets costing $2,500 or less ($5,000 with audited financial statements or similar) The term “safe harbor” means that the IRS will accept your expensing of the qualified assets if you properly abided by the safe harbor rules...

HSAs for Business Owners

Written by Coach Janelle CPA on September 2, 2023

When enacted, the Affordable Care Act (ACA) eliminated most small-business health plans that reimbursed individually purchased health insurance. Consequently, many small business owners with fewer than 50 employees chose health savings accounts (HSAs) or opted to provide no health coverage at all....

Update on State Pass-Through Entity Taxes Beating the SALT

Written by Coach Janelle CPA on September 6, 2023

Here are some critical updates on the pass-through entity tax (PTET), which has recently become the rule in most states rather than the exception. The PTET enables owners of pass-through businesses, such as S corporations and multi-member LLCs, to navigate around the $10,000 annual limit on state and local taxes (SALT).

Share Us On Social Media


Follow me. Let's be friends!


Follow me. Let's be friends!

© 2021 Coach Janelle CPA. 
All Rights Reserved.

Follow me on socials

Sign up for our weekly newsletter

Get the latest tax planning tips content delivered straight to your inbox.

© 2021 Coach Janelle CPA. 
All Rights Reserved.

Follow me on socials

Sign up for our weekly newsletter

Get the latest tax planning tips content delivered straight to your inbox.