Renovation and Improvement Studies
Renovations raise two questions: how to classify the new work, and what to do with the basis of the components that were removed. The tangible property regulations decide what must be capitalized. A study can then classify the capitalized cost and support a partial disposition election.
Educational information, not tax advice.
Updated 2026-10-14
Key takeaways
- Whether work is a deductible repair or a capital improvement is decided under the tangible property regulations.
- Capitalized improvements can be classified like any other cost — including as 15-year qualified improvement property in nonresidential buildings.
- The partial disposition election can let you recognize a loss on removed building components.
- Qualified improvement property does not apply to residential rental buildings.
- The improvement tests are applied to the building structure and to each building system separately.
Treasury Regulation §1.263(a)-3 requires capitalizing amounts paid for a betterment, a restoration, or an adaptation of a unit of property to a new or different use. For buildings, the test is applied separately to the building structure and to each building system — HVAC, plumbing, electrical, elevators, escalators, fire protection, security, and gas distribution.
Once a renovation cost is capitalized, it is depreciated like any other asset. A renovation often includes a mix of items: new finishes, equipment, wiring, and structural work. Classifying them separately follows the same rules as a full-building study.
The current rule is the regulation, not older repair cases. Plainfield-Union Water Co. is pre-regulation background, and the IRS nonacquiesced in it. Lead with Treas. Reg. §1.263(a)-3 when deciding whether work is a repair.
Removed components raise a second basis question. Without an election, the remaining basis of a replaced roof or HVAC unit usually stays in the building and continues to depreciate. Treas. Reg. §1.168(i)-8 lets the owner elect to treat the disposition of a portion of an asset as a disposition.
Educational information, not tax advice. Whether to capitalize, how to classify, and whether to elect a partial disposition are return decisions for your CPA.
Qualified improvement property
Interior improvements made by the taxpayer to a nonresidential building after the building was first placed in service can be qualified improvement property, with a 15-year straight-line recovery period. Enlargements, elevators and escalators, and internal structural framework are excluded. Qualified improvement property does not apply to residential rental buildings.
As 15-year property, QIP is generally bonus-eligible. As of October 16, 2026, qualified property acquired after January 19, 2025 can take 100% additional first-year depreciation. A remodel that is QIP can therefore have a very different first year from the same work left in the 39-year building.
Who made the improvement matters. A tenant’s interior work can be the tenant’s QIP. A landlord’s work is tested on the same “made by the taxpayer” language. Leasehold facts should be reviewed with a CPA.
Removed components
When an old roof, HVAC unit, or other component is removed, its remaining basis normally keeps being depreciated as part of the building. Under Treas. Reg. §1.168(i)-8, an owner can elect a partial disposition and recognize a loss on the removed component instead. The election is generally made on the timely filed return for the year of the disposition.
To use it, you need a reasonable figure for the removed component's basis. A cost segregation study of the original building, or a study done at the time of renovation, can supply one.
The regulation’s elevator example is the usual illustration: replacing one of four elevators is not a disposition without the election; with the election, depreciation on the retired elevator stops and a loss can be recognized. For assets in classes 00.11–00.4, the election is available only if the replacement portion is classified in the same asset class.
Repairs
Work that is not a betterment, restoration, or adaptation can be a deductible repair. The regulations also provide safe harbors, including a routine maintenance safe harbor for recurring work the owner expects to perform more than once in a ten-year period for a building.
The IRS tangible-property overview also describes a de minimis safe harbor and a small-taxpayer safe harbor. Those amounts and tests are elections with their own conditions. They do not reclassify a capitalized improvement as personal property.
A study that prices every invoice in a remodel as a depreciable component without first asking whether the invoice is a repair is skipping the regulation. Classification comes after capitalization.
What a renovation study usually includes
The file should separate invoices that repair a system from invoices that improve it, identify removed components, and classify the capitalized remainder. Drawings, permits, and before-and-after photographs help show scope.
Residential remodels do not use QIP. Their capitalized interiors stay in the 27.5-year building unless they are personal property or another defined class on the facts. Applying a 15-year QIP label to an apartment refresh is the wrong statute. The 80% dwelling-unit test still decides the building class before any interior work is labeled.
Filing the elections
The partial disposition election is generally made on the timely filed return for the year of the disposition. Late-election procedures, if available, are a CPA question. Designated change number 205 in Rev. Proc. 2025-23 covers certain building-disposition method changes.
A renovation of property already on the books can also require a classification method change if prior returns treated similar work differently. Form 3115 is the usual path. This article does not choose a designated change number for your facts.
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