The partial asset disposition election, and why you need a study to make it

The problem

You replace a roof, a chiller, a storefront or a tenant's entire build-out. The new asset goes on the schedule. The old one, physically gone, stays on the schedule and keeps depreciating for another two decades.

You are simultaneously depreciating an asset that does not exist and depreciating its replacement. That is not a rounding error on a $340,000 roof.

The election

The tangible property regulations permit an election to treat the disposal of a structural component as a disposition, writing off its remaining adjusted basis in the year of replacement.

It is an annual election made on a timely-filed return, including extensions, for the year the disposition occurs.

The obstacle

You cannot write off the remaining basis of a component without knowing what that component cost. Your schedule shows one line for the building.

That is exactly what a cost segregation study establishes: a component-level basis allocation. Once you have it, the disposition calculation becomes arithmetic.

The second benefit

Beyond the write-off, a partial disposition also means the removal costs are generally deductible rather than capitalised into the new asset — because you are not required to capitalise the cost of removing something you have treated as disposed.

Sequencing

Run the study before the capital project where you can. The study establishes what the old components cost while they still exist to be inspected and documented. Afterwards you are reconstructing from records that may not exist.

Owners planning a roof replacement, a mechanical upgrade, a repositioning or a franchise-mandated renovation should be commissioning a study in the same conversation as the contractor bid.

Missed prior years

A partial disposition election missed in a prior year is generally not available retroactively as a late election, though a related method change may be available in some circumstances. This is one where the timing genuinely matters, so raise it with your preparer before the work starts.