Illustrative Renovation Project
A hypothetical interior renovation used to show capitalization, possible QIP, and a partial disposition of a retired roof or HVAC unit. Educational information, not tax advice.
Educational information, not tax advice.
Updated 2026-10-14
Assumptions
- Educational information, not tax advice.
- Assume an office building already placed in service. The owner replaces a roof, a rooftop HVAC unit, and the third-floor interior, and modernizes an elevator.
- Repair versus capital is decided under Treas. Reg. §1.263(a)-3 before any recovery-period classification.
- Any dollar figures below are invented for arithmetic only. They are not a typical mix and not a client result.
Key takeaways
- Decide repair versus capital first. Then classify the capitalized work.
- Consider a partial disposition of what was torn out under Treas. Reg. §1.168(i)-8(d)(2). The study identifies assets; the CPA files elections.
- Interior work may be QIP if §168(e)(6) is met. Elevator modernization, enlargements, and internal structural framework are out.
- A roof and HVAC restoration are generally recovered with the building, with a possible §179 election for certain nonresidential roofs and HVAC as qualified real property — a CPA decision.
An office owner replaces a roof, a rooftop HVAC unit, and the third-floor interior. The roof and HVAC are restorations of building systems — capitalized, generally recovered with the building, with a possible §179 election for nonresidential roofs and HVAC as qualified real property. The interior, if it meets the QIP definition, is 15-year property. Suppose, for arithmetic only, capitalized renovation of $1,800,000 excluding the elevator. Invented figures; no tax savings claimed.
The owner’s CPA considers Treas. Reg. §1.168(i)-8(d)(2) for the old roof and old HVAC remaining basis. The study’s role is to identify those assets and the new work, not to file the election.
Order of operations on a renovation: identify the unit of property (building structure and each building system under the tangible property regulations); decide repair versus improvement; capitalize what must be capitalized; classify those costs (39-year building, 15-year QIP, 5- or 7-year personal property); consider partial disposition of retired components; inspect; reconcile to the job’s capitalized total; CPA files Form 4562 and any elections.
Repair versus capital first
Treas. Reg. §1.263(a)-3 requires capitalization of betterments, restorations, and adaptations to a new use. For a building, the test applies separately to the building structure and each building system (HVAC, plumbing, electrical, elevators, escalators, fire protection, security, gas distribution, and others designated in guidance). Replacing a roof and a rooftop unit are typical restorations of those units of property. Refreshing paint might be a repair. Percentages in regulation examples are not standards. Plainfield-Union is a pre-regulation case and the IRS nonacquiesced; lead with the regulation.
Safe harbors (de minimis, routine maintenance, small taxpayer) can change the answer on smaller invoices. Those elections are CPA decisions. Cost segregation does not override a repair deduction the taxpayer validly takes.
QIP exclusions
The elevator modernization in this example is not QIP. Enlargements and internal structural framework are also out. Qualified improvement property under §168(e)(6) is an improvement to the interior of a nonresidential building placed in service after the date the building was first placed in service, excluding enlargements, elevators and escalators, and internal structural framework. The third-floor interior that meets those tests is 15-year property, generally bonus-eligible, recovered straight line.
Do not label the roof or the elevator as QIP. Do not label the original 1980s building as QIP. QIP is later interior work by the taxpayer who places it in service.
Partial disposition
When the old roof and old HVAC are retired, remaining adjusted basis can be recognized as a loss if the taxpayer makes a partial disposition election under Treas. Reg. §1.168(i)-8. The study identifies the retired assets and, where records allow, their remaining basis. If the original building was never componentized, estimating the old roof’s remaining basis is itself a documentation problem for the CPA. The study does not file the election.
General asset account treatment, if the taxpayer elected it, can change disposition results. That is another CPA overlay, not a classification result.
§179 and bonus overlays
Some nonresidential roofs, HVAC, and similar qualified real property can be §179 property if the statutory tests and dollar limits for the tax year are met. Limits are inflation-adjusted (for 2026, see Rev. Proc. 2025-32). This illustration does not elect §179 or compute the dollar cap. Bonus depreciation under §168(k) can apply to QIP and to personal property in the interior package, with acquisition dates as of Notice 2026-11. Binding contracts signed before January 20, 2025 stay on the phase-down. This page does not compute a taxpayer’s tax.
State decoupling, such as California’s nonconformity illustrated on FTB 3885 instructions, can reverse the federal picture on a state return. Keep state claims general unless a state source is in front of you.
Inspection, reconciliation, and filing
Photograph the old roof before tear-off if possible, the new membrane, the new rooftop unit, the third-floor finishes, and the elevator equipment. Tie contractor invoices to those systems. Reconcile the invented $1,800,000 — or the actual capitalized job — without pulling landlord work or tenant FF&E into the owner’s basis.
If the owner had been depreciating the building as one 39-year asset and this study also reclassifies historical components, that look-back is generally Form 3115 / §481(a), referred to the CPA (F-04). Educational information, not tax advice.
Sources
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- 4IRS Publication 946 — How To Depreciate Property (2025)(opens in a new tab)
Appendix B reproduces the Rev. Proc. 87-56 class lives.
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