Is a Water Heater Qualified Improvement Property?

The tax classification of a property improvement can significantly alter its tax treatment and a business’s cash flow. One classification, Qualified Improvement Property (QIP), offers an advantageous path for depreciation. The question of whether a common improvement like a new water heater can be treated as QIP is complex. This classification is the gateway to accelerated methods like bonus depreciation, which allows an immediate write-off of an asset’s cost, though this benefit is gradually being reduced.

Defining Qualified Improvement Property

Qualified Improvement Property is a designation under the Internal Revenue Code for certain improvements made to buildings. To meet this definition, an improvement must satisfy three core requirements: it must be made to an interior portion of a nonresidential real property, and it must be placed in service after the date the building itself was originally placed in service.

The definition of QIP is also shaped by three specific exclusions. Any expenditure for the enlargement of the building, the installation of a new elevator or escalator, or an improvement to the “internal structural framework” of the building cannot be QIP. The internal structural framework includes essential components like walls, partitions, floors, and ceilings, as well as the building’s plumbing, electrical wiring, and central heating and air-conditioning systems.

Classifying a Water Heater

A water heater is a component of a building’s plumbing system. The Internal Revenue Service considers a building’s plumbing system to be a core component of its “internal structural framework.” As established in the rules for QIP, any improvement to the internal structural framework is explicitly excluded from the definition.

Because a water heater is treated as part of the plumbing system, it falls squarely within this statutory exclusion. Therefore, the cost of purchasing and installing a new water heater in a nonresidential building does not qualify for treatment as QIP. The structural component rule overrides the other criteria, making the water heater ineligible for associated accelerated depreciation benefits.

Correct Depreciation of a Water Heater

Since a water heater is not Qualified Improvement Property, its cost must be capitalized and depreciated. As a structural component, its cost is recovered over the same period as the building it serves. Under the Modified Accelerated Cost Recovery System (MACRS), the recovery period for a water heater in a residential rental property is 27.5 years using the straight-line method. If installed in a nonresidential building, the recovery period is 39 years, also using the straight-line method.

For example, a new $3,900 water heater in a commercial office building would have an annual depreciation deduction of $100 ($3,900 divided by 39 years). This slow recovery contrasts with accelerated deductions available for QIP. Property placed in service in 2025 that qualifies for bonus depreciation can still receive a 40% first-year deduction, highlighting the financial importance of correct classification.

Alternative Accelerated Depreciation Options

While a water heater does not qualify as QIP, other tax code provisions may allow for a more rapid recovery of its cost. The Section 179 deduction allows taxpayers to elect to expense the full cost of qualifying property in the year it is placed in service. Section 179 can apply to certain improvements to nonresidential real property, including plumbing, heating, and air-conditioning systems.

The Section 179 deduction is subject to limitations. For tax years beginning in 2025, the maximum amount a business can expense is $1,250,000. This deduction begins to phase out if the total cost of qualifying property placed in service during the year exceeds $3,130,000. The total deduction also cannot exceed the taxpayer’s aggregate net taxable income from its active trades or businesses for the year.

Another option is the De Minimis Safe Harbor Election under Treasury Regulation 1.263(a). This election allows a business to immediately expense low-cost asset purchases that would otherwise need to be capitalized. To use this safe harbor, a business must have a consistent accounting procedure in place at the beginning of the year to expense items below a certain dollar amount.

The applicable threshold depends on whether the business has an Applicable Financial Statement (AFS). For taxpayers with an AFS, the threshold is $5,000 per item or invoice. For businesses without an AFS, the threshold is $2,500 per item or invoice. If the total cost to purchase and install a water heater is below this applicable limit, a business can make an annual election to expense the entire amount.