Is a Furnace Qualified Improvement Property? Rules and Tax Benefits

A furnace installed inside an existing nonresidential building generally is Qualified Improvement Property. That classification gives the furnace a 15-year recovery period, and for property placed in service in 2026 it qualifies for 100 percent first-year bonus depreciation. The alternative, if the furnace does not meet the QIP tests, is a 39-year write-off that stretches deep into the building’s future.¹

Why a Furnace Fits the QIP Definition

QIP covers improvements a taxpayer makes to the interior of a nonresidential building, placed in service after the building itself was placed in service. Three categories are carved out no matter where they sit: building enlargements, elevators and escalators, and work on the internal structural framework.¹

A commercial furnace is a component of the HVAC system, which the IRS treats as one of eight building systems under the tangible property regulations.² The furnace sits inside the building, serves an interior climate-control function, is not part of the structural framework, does not enlarge the footprint, and is not vertical transportation. All three exclusions are clear.

Related HVAC components installed with the furnace follow the same path. Ductwork, air handlers, and diffusers are all parts of the HVAC building system, and replacing or adding them inside an existing commercial building lands in QIP alongside the furnace.

Building Conditions That All Have to Be True

Three conditions have to hold at the building level. Miss one and the classification fails.

Nonresidential Real Property

The building must be nonresidential real property, meaning it carries a 39-year recovery period under the general depreciation system. Office buildings, retail stores, warehouses, factories, and restaurants qualify. Apartment buildings and residential rentals do not. In a mixed-use building, only improvements to the commercial portion can be QIP.

Already Placed in Service

“Placed in service” means the building was ready and available for its intended use before the furnace project. A furnace installed during original construction is not an improvement; it is part of the building’s initial basis and depreciates over 39 years with the rest of the structure. Only a furnace added after the building has begun its operational life qualifies as QIP.

Made by the Taxpayer

The statute requires the improvement to be “made by the taxpayer.” If you buy a building whose prior owner recently installed the furnace, that furnace was their improvement, not yours. Your QIP clock starts with what you initiate after acquiring the property.

Is It Actually an Improvement, or a Repair?

QIP treatment only comes into play if the expenditure has to be capitalized in the first place. The tangible property regulations divide HVAC spending into repairs you can deduct now and improvements you have to capitalize and depreciate. The line is where most mistakes happen.

Capitalization is required when the work does any of the following to the HVAC system:

Betterment: fixing a pre-existing defect, adding a major component, or materially increasing capacity, efficiency, or output. Swapping an old unit for a high-efficiency furnace that meaningfully boosts heating performance is a classic betterment.
Restoration: replacing a major component or substantial structural part of the system, or bringing a system that broke down entirely back to working condition.
Adaptation: converting the system to a new or different use it was not serving when first placed in service.

An expenditure that meets any of those tests is capitalized, and the capitalized amount is what flows into the QIP analysis.²

Routine maintenance can be deducted as a repair without touching QIP at all. There is a safe harbor for recurring maintenance you reasonably expect to perform more than once during the first ten years after placing the system in service. Filter changes, duct cleaning, and minor component fixes typically fit. Replacing the entire furnace almost never does.

What QIP Classification Is Worth in 2026

Three accelerated recovery tools are available once the furnace clears QIP.

100 Percent Bonus Depreciation

The One Big Beautiful Bill Act, signed on July 4, 2025, restored 100 percent first-year bonus depreciation for qualifying property placed in service after January 19, 2025.³ For a furnace placed in service in 2026, the entire cost can be deducted in year one. QIP qualifies because its recovery period is 20 years or less under the general depreciation system.¹

This is a shift from the prior phase-down. Bonus depreciation had dropped to 40 percent for 2025 and would have fallen to 20 percent in 2026 under the old schedule. The restoration makes 2026 a particularly favorable year for a new furnace.

Section 179 Expensing

As an alternative, you can elect to expense the furnace under Section 179. For tax years beginning in 2026 the deduction limit is $2,560,000, phasing out dollar-for-dollar once total qualifying property placed in service during the year exceeds $4,090,000.⁴ Those figures reflect the higher base amounts enacted by the One Big Beautiful Bill Act, adjusted for inflation.⁵

Section 179 has one practical edge over bonus: you pick the amount to expense, which helps if you want to manage taxable income in a specific year. Bonus depreciation is all or nothing unless you elect out entirely.

15-Year Straight-Line

Elect out of bonus and skip Section 179, and the furnace depreciates over 15 years using the straight-line method under the general depreciation system. Smaller annual deductions, but a smaller recapture problem if you sell soon.

The 163(j) Election That Kills QIP Treatment

A business that elects to be treated as a real property trade or business under the Section 163(j) interest limitation must depreciate QIP under the Alternative Depreciation System. That stretches the recovery period to 20 years and disqualifies the property from bonus depreciation. The election is irrevocable. A business that made it to deduct more interest expense has permanently lost accelerated QIP treatment on every future interior improvement, furnace included. Run the numbers on both sides before making the election.

What Recapture Costs at Sale

Accelerated depreciation is not free. When you sell the building, QIP is Section 1250 property, and the depreciation you claimed above what straight-line would have produced is recaptured as ordinary income at your regular tax rate.⁶

Take 100 percent bonus on a furnace and sell three years later, and the gap between what you deducted and what 15-year straight-line would have produced is substantial. That excess is taxed as ordinary income rather than at capital gains rates. The remaining gain attributable to the straight-line portion is taxed at a maximum 25 percent as unrecaptured Section 1250 gain. Bonus depreciation still usually wins on present value, but recapture belongs in the plan if a sale is on the horizon.

Records to Keep

The IRS can challenge a QIP classification years after filing. A first-year deduction that dwarfs what would be expected for a standard repair tends to draw scrutiny. Keep:

Proof of the building’s placed-in-service date, such as a certificate of occupancy or lease commencement record showing the building was operational before the furnace work.
Contractor proposals and invoices establishing that the furnace was an interior improvement and not part of a building enlargement or structural modification.
A written memo explaining why the expenditure is a capital improvement under the betterment, restoration, or adaptation tests rather than a deductible repair.

1
Office of the Law Revision Counsel. 26 USC 168 Accelerated Cost Recovery System
2
Internal Revenue Service. Tangible Property Final Regulations
3
Internal Revenue Service. One Big Beautiful Bill Provisions
4
Internal Revenue Service. Revenue Procedure 2025-32
5
Office of the Law Revision Counsel. 26 USC 179 Election to Expense Certain Depreciable Business Assets
6
Office of the Law Revision Counsel. 26 US Code 1250 – Gain From Dispositions of Certain Depreciable Realty