Qualified Leasehold Improvement Property

What is Qualified Leasehold Improvement Property (QLIP)?

Qualified Leasehold Improvement Property (QLIP) pertains to improvements made to the interior of a nonresidential building, specifically under a lease agreement, by either the lessor (landlord) or lessee (tenant). These improvements must be made to areas exclusively occupied by the lessee and can potentially qualify for special depreciation treatments like Additional First-Year Depreciation and Bonus Depreciation.

To qualify as QLIP, the following conditions must be met:

1. The improvement must be made to an interior portion of a building.
2. The building must be at least three years old.
3. The improvement must be made under a lease agreement.
4. The lessor and lessee cannot be related parties.

Exclusions

Certain improvements do not qualify for Bonus Depreciation under QLIP, including:

• Enlargement of a building
• Elevators and escalators
• Structural components benefiting common areas
• Internal structural framework of the building

Example Scenarios

1. Tenant Build-Out: A company leases office space in a five-year-old building and decides to renovate the interior space. Improvements such as installing new lighting, flooring, and wall partitions could qualify as QLIP, provided the lessor and lessee are not related.

2. Restaurant Renovation: A restaurant tenant redoes the interior dining area of the leased space in a seven-year-old commercial building. These renovations may qualify for Bonus Depreciation, provided they are undertaken within the leased space and not in common areas or as structural adjustments.

Frequently Asked Questions (FAQs)

1. What is the primary advantage of qualifying for QLIP?

   • The primary advantage is the potential eligibility for significant depreciation benefits, like Additional First-Year Depreciation and Bonus Depreciation, which can provide substantial tax savings.

2. Can any improvement qualify as QLIP?

   • No, only improvements to the interior portion of a leased nonresidential property made under specific conditions, excluding certain structural improvements, can qualify.

3. Are related parties allowed in QLIP transactions?

   • No, the lessor and lessee must not be related parties for the improvements to qualify under QLIP criteria.

4. Does the entire building need to be at least three years old, or just the part being improved?

   • The entire building must be at least three years old at the time the improvement is made to qualify for QLIP.

Related Terms

• Bonus Depreciation: A tax incentive that allows businesses to immediately deduct a significant percentage of the purchase price of eligible business assets.
• Leasehold Improvement: Modifications made to rental space to meet the needs of a tenant, which may be reimbursed through favorable tax treatments.
• Depreciation: The allocation of the cost of a tangible asset over its useful life.

Online Resources

• IRS Publications on Leasehold Improvements: Contains detailed IRS regulations and tax treatments for leasehold improvements.
• Internal Revenue Code Section 168: Legal code detailing depreciation and amortization rules.
• Cost Recovery and Depreciation at Investopedia: Detailed articles explaining various aspects of asset depreciation.

References

1. Internal Revenue Code Section 168
2. IRS Publication 946, “How To Depreciate Property”
3. Investopedia articles on Leasehold Improvements, Depreciation, and Bonus Depreciation

Suggested Books for Further Study

1. “Tax Savvy for Small Business” by Frederick W. Daily - This book offers practical advice on tax deductions, including leasehold improvements.
2. “Depreciation: Accounting and Tax Insights” by Gregory J. Weiland - A detailed look at depreciation from both an accounting and tax perspective.
3. “Real Estate Investment: A Strategic Approach” by David M. Geltner - This book provides a comprehensive approach to real estate investment, including depreciation strategies.

Real Estate Basics: Qualified Leasehold Improvement Property (QLIP) Fundamentals Quiz