Qualified Production Property: A New Era of Immediate Expensing

For decades, non-residential real estate has faced long depreciation schedules, with property depreciated over 39 years. While cost segregation studies helped accelerate deductions for certain components, the majority of assets still sat in the long-life bucket.

With the introduction of § 168(n) in the OBBBA, we now have a new category: Qualified Production Property (QPP). This provision could be one of the most impactful shifts in how certain types of property are treated for tax purposes.

What Is Qualified Production Property?

Under § 168(n), a “special allowance for qualified production property” applies to real, non-residential property that meets specific requirements.

To qualify:

• The property must be located in the United States
• Original use must commence with the taxpayer
• It must be integral to a qualified production activity

Importantly, food production doesn’t qualify if it’s served in the same area (restaurants are excluded).

What Counts as Qualified Property?

The rules are fairly narrow. QPP applies primarily to factory operations, the “factory floor” and its supporting systems.

Excluded uses include:

• Office space
• Parking lots
• Sales areas
• Engineering and administrative functions

In other words, only property directly tied to production, manufacturing, or refining activities is eligible.

This could mean that even with the QPP election, a mini cost segregation study may still be needed to separate eligible from ineligible sections of a building.

Timing and Eligibility

To qualify, construction must begin or property must be acquired after January 19, 2025.

The election (likely through Form 4562) could allow 50–80% of a qualifying building to be expensed immediately. That’s a dramatic shift from the traditional 39-year timeline.

What Activities Qualify?

Per the House Budget Committee Report and legislative text, qualifying activities include:

• Manufacturing
• Production
• Refining

These activities must involve a “substantial transformation”, a tax code term meaning the creation of a new article with a different name, character, or use.

Examples:

• Yes: Food manufacturing, chemical production, metal or petroleum refining
• No: Laundromats, car washes, auto repair shops

Two Big Limitations to Watch

1. Owner-Operator Requirement
   • Property can’t simply be leased to an operator.
   • To qualify, you must own and operate the facility yourself.
   • Syndicator/GP partnerships may be possible, but more guidance is needed.
2. 10-Year Recapture Rule
   • If property ceases to qualify within 10 years (e.g., converted from a factory to a warehouse), immediate depreciation recapture is triggered.
   • This could create significant phantom income if the backup plan involves non-qualifying use.

Why This Matters

The creation of QPP represents a major opportunity for investors in manufacturing, refining, and production-related industries. By accelerating deductions, the provision encourages reinvestment into U.S.-based facilities and reduces the tax drag that has long been tied to industrial property.

However, there are still many unanswered questions. Guidance from Treasury will be critical to understanding exactly how QPP applies and where the boundaries are drawn.

Final Thoughts

Qualified Production Property has the potential to reshape tax strategy for industrial and production-focused real estate. While not every investor will benefit, those operating in manufacturing or refining should pay close attention.

This is a new and evolving area, and with immediate expensing on the table, the stakes are high. More clarity will come as Treasury issues guidance, but for now, QPP stands as one of the most exciting tax opportunities in recent memory.

If you want to understand how recent legislation applies to your strategy, book a discovery call and start working with our team today.

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