A nonlinear time-domain system identification algorithm using measured acceleration data is developed for structural damage assessment. To take account of nonlinear behavior of structural systems, an output error between measured and computed acceleration increments has been defined and a constrained nonlinear optimization problem is solved for optimal structural parameters. The algorithm estimates time-varying properties of stiffness and damping parameters. Nonlinear response of restoring force of a structural system is recovered by using the estimated time-varying structural properties and computed displacement by Newmark-$eta$ method. In the recovery, no pre-defined model for inelastic behavior has been assumed. In developing the algorithm, noise and incomplete measurement in space and state have been considered. To examine the developed algorithm, numerical simulation and laboratory experimental studies on a three-story shear building have been carried out.