How Long Are Leasehold Improvements Depreciated: 15 or 20 Years?

Leasehold improvements that meet the definition of Qualified Improvement Property are depreciated over 15 years under MACRS. Improvements that fall outside that definition, such as structural work, building enlargements, elevators, escalators, and exterior changes, get lumped in with the building and depreciated over 39 years. In practice, most taxpayers never spread the deduction across the full 15 years, because bonus depreciation and Section 179 expensing let them write off the full cost in the year the improvement is placed in service.¹

Which Improvements Get the 15-Year Period

The 15-year recovery period applies to Qualified Improvement Property, or QIP. QIP is any improvement to the interior of a nonresidential building, placed in service after the building itself was first placed in service. Build-out costs baked into a brand-new building don’t count. Only later interior work qualifies.¹

Typical QIP includes new partition walls, dropped ceilings, updated electrical wiring, plumbing for a break room, and interior lighting. It’s the sort of work a tenant does to turn raw commercial space into a functioning office, restaurant, or retail store.

Three categories of interior work are carved out of QIP even though they happen inside the building:

Building enlargements that add square footage or expand the footprint.
Elevators and escalators.
Internal structural framework, including load-bearing walls, columns, and structural supports.

Those excluded items get depreciated over 39 years as part of the building, using the straight-line method with a mid-month convention. Exterior work such as a new roof, facade upgrades, or parking lot improvements also sits outside QIP and follows the same 39-year schedule.¹ Getting the classification right is worth some effort on any significant renovation: the difference between a 15-year and a 39-year write-off is real money.

How the 15-Year Schedule Works

QIP placed in service after December 31, 2017, carries a 15-year MACRS recovery period, roughly two-and-a-half times faster than the 39 years assigned to the building shell.¹

The method is straight-line, so the deduction is spread evenly. QIP uses the half-year convention, which treats the asset as placed in service at the midpoint of the year regardless of the actual date. The first and last years are half-sized deductions, and the schedule spans 16 tax returns rather than exactly 15.

One point that catches people off guard: the 15-year period has nothing to do with the length of your lease. Older rules sometimes tied depreciation to the shorter of the useful life or the remaining lease term. That approach is gone. A tenant with a five-year lease depreciates QIP over the same 15 years as a tenant with a twenty-year lease.

Why Most Taxpayers Skip the 15-Year Schedule

Because QIP has a 15-year recovery period, it qualifies for bonus depreciation, which is available for any MACRS property with a recovery period of 20 years or less. That eligibility is what turns a 15-year deduction into a one-year deduction.

The One, Big, Beautiful Bill permanently restored the 100% first-year depreciation deduction for qualified property acquired and placed in service after January 19, 2025.² QIP placed in service in 2026 and beyond qualifies for a full 100% deduction with no scheduled phase-down.

The earlier TCJA phase-down still governs property placed in service before that date. Property placed in service during 2023 got 80%, 2024 got 60%, and property placed in service between January 1 and January 19, 2025 got 40%. Taxpayers can’t go back and claim the permanent 100% rate for property already in service before January 20, 2025.

Bonus depreciation is automatic unless you opt out. A taxpayer who wants to spread deductions over 15 years, perhaps to match income in later years, can elect out by filing a statement with Form 4562 by the due date, including extensions, of the return for the year the property is placed in service. The election applies to all qualified property in the same MACRS class placed in service that year, not just one project.³

Section 179 as the Other Fast Track

QIP also qualifies for Section 179 expensing, which allows the full cost to be deducted in the year the improvement is placed in service.⁴

For 2026, the maximum Section 179 deduction is $2,560,000. It begins phasing out dollar-for-dollar once total qualifying property placed in service during the year exceeds $4,090,000, and it disappears at $6,650,000. These thresholds adjust annually for inflation.

Section 179 also reaches items that aren’t QIP on their own. When elected for qualified real property, it covers roofs, HVAC systems, fire protection and alarm systems, and security systems installed after the building was first placed in service.⁴

The important difference from bonus depreciation: a Section 179 deduction cannot create or increase a net operating loss. It can only reduce taxable income to zero, with the unused amount carried forward. Bonus depreciation has no such limit, which makes it the more powerful option when renovation costs exceed income for the year.

When 20 Years Applies Instead

Some taxpayers are pushed onto the Alternative Depreciation System, which assigns QIP a 20-year recovery period and disqualifies it from bonus depreciation.

The most common trigger is the Section 163(j) election. A business classified as a real property trade or business can elect out of the cap on business interest expense deductions, but in exchange all real property, including QIP, must then be depreciated under ADS.¹ For a heavily leveraged landlord, uncapped interest deductions may be worth more than faster depreciation. Tax-exempt use property and property used predominantly outside the United States also requires ADS.

If the Lease Ends Before Depreciation Finishes

When a lease terminates before QIP has been fully depreciated, the remaining basis doesn’t disappear. Whoever paid for the improvements, tenant or landlord, can claim the leftover basis when the improvements are permanently retired.

If the improvements are abandoned at lease-end, ripped out, or left behind, the remaining adjusted basis is deductible as an ordinary loss, reported on Form 4797, Part II, line 10.⁵ Ordinary loss treatment offsets all types of income without the annual caps that apply to capital losses. The loss is claimed in the tax year the improvements are permanently taken out of service, not the year the lease was signed or the year the tenant vacated. A lease clause showing the tenant has no obligation or right to remove the improvements, combined with evidence the space was surrendered, is typically enough documentation.

If the improvements are sold to the landlord or transferred to a new tenant for payment, the transaction produces a gain or loss based on the sale price minus the remaining adjusted basis. QIP is Section 1250 property, so any gain attributable to depreciation already claimed is subject to recapture. For straight-line depreciation, that gain is generally taxed at the unrecaptured Section 1250 rate of 25%. If improvements are transferred to the landlord for no consideration, the tenant claims the abandonment loss and the landlord may recognize taxable income equal to the fair market value of what was received.

The Practical Answer for 2026 Build-Outs

The 15-year recovery period is the statutory answer to how long leasehold improvements are depreciated, but it’s rarely the schedule taxpayers actually follow. For a commercial tenant completing an interior build-out in 2026, 100% bonus depreciation on QIP combined with Section 179 on qualifying building systems typically absorbs the entire renovation cost in year one. The 15-year life still matters because it’s what qualifies QIP for those accelerated methods in the first place. It just usually stays in the background.

1
Office of the Law Revision Counsel. 26 U.S. Code 168 – Accelerated Cost Recovery System
2
Internal Revenue Service. Treasury, IRS Issue Guidance on the Additional First Year Depreciation Deduction Amended as Part of the One Big Beautiful Bill
3
Internal Revenue Service. Additional First Year Depreciation Deduction (Bonus) – FAQ
4
Internal Revenue Service. Publication 946 – How To Depreciate Property
5
Internal Revenue Service. 2025 Instructions for Form 4797