Treatment of Partial Dispositions of Fixed Assets

Don’t Miss This Valuable Tax Write-Off During Renovations: What to Know About Partial Dispositions

When it comes to real estate renovations or property improvements, many business owners and investors miss out on a powerful tax-saving opportunity: the partial disposition election.

If you're replacing a roof, demoing part of a building, or updating systems like HVAC or plumbing, you may be able to write off the remaining undepreciated value of the old component you removed—even if the building itself remains in service. This can lead to immediate deductions and better alignment between your financials and your actual property usage.

Here’s what you need to know.

What Is a Partial Disposition?

A partial disposition allows you to recognize a loss for part of an asset (like a building component) when it’s retired, replaced, or demolished—even if the larger property remains on your books. This avoids continuing to depreciate property that’s no longer there or in use.

This rule became official with the IRS Tangible Property Regulations (TPRs), effective for tax years starting on or after January 1, 2014. The guidance is found under Treas. Reg. §1.168(i)-8.

When Does It Apply?

You may qualify for a partial disposition if you’ve:

• Replaced a roof, HVAC, or major building system

• Renovated tenant space or a portion of a building

• Demolished part of a structure during remodeling

• Removed a structural component or system (like walls, wiring, plumbing)

  
  

What Are the Requirements?

To take advantage of this deduction, a few things must be in place:

• The original asset is still on the books (i.e., not fully depreciated or written off already).

• A reasonable method is used to allocate the cost of the portion disposed. This can include:

  • Cost segregation studies

  • Engineering reports or appraisals

  • RSMeans or other industry cost guides

  • A reasonable pro-rata allocation

• The election must be made timely, typically on the return for the year the disposition occurs (or via Form 3115 in some cases).

  
  

How It’s Handled on the Tax Return

• Loss Reporting: The undepreciated amount is treated as a loss—either Section 1231 or ordinary, depending on the situation.

• Asset Schedule: The old component must be removed from your depreciation schedule.

• Form 4797: This is where the partial disposition gets reported—Part III for Section 1231 property or Part II for personal property.

  
  

Key Planning Tips

• Coordinate with Cost Segregation: If you’re planning or recently completed a renovation, a cost segregation study can help accurately value the portion of the property that was removed.

• Review Capitalization Rules: Some improvements may qualify for immediate expensing under the de minimis safe harbor or repair rules under §1.162-4 instead.

• Client Communication Matters: If you’re planning major upgrades or improvements, let’s talk. You may be able to unlock deductions you’re not currently capturing.

  
  

Final Thoughts

Partial dispositions remain one of the most overlooked—but effective—ways to increase deductions and reduce taxable income during a renovation or remodel.

Whether you’re a real estate investor, commercial landlord, or a business owner updating your space, this is a strategy worth considering.

At Shifflett & Philips, we help our clients identify and apply these opportunities proactively. If you’ve completed property improvements or plan to do so in the near future, let’s discuss how this rule could apply to your situation.

Schedule your mid-year or year-end tax planning meeting today to make sure you’re not leaving money on the table.