Part 3 of our recapture series. Educational only — not tax advice.
The Building Is Not Always One Asset
When you replace a major building component — a roof, an elevator, an HVAC system — you face a choice the tax code explicitly allows: treat the disposed portion as a separate disposition. IRS Publication 544 recognizes the sale or other disposition of a portion of a MACRS asset and computes gain or loss using the adjusted basis of that disposed portion.
The IRS Elevator Example
Publication 544 walks through an old elevator with an allocated cost of $5,000 and accumulated depreciation of $2,500, sold for $1,000. The disposed portion's adjusted basis is $2,500, so the result is a $1,500 loss — recognized now, rather than continuing to depreciate an elevator that no longer exists while also depreciating its replacement.
A taxpayer may identify the portion of building basis and accumulated depreciation attributable to a disposed structural component and compute gain or loss on that portion separately. — IRS Publication 544, partial-disposition example
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Why It Cuts the Other Way Too
Publication 544's bulldozer-bucket example shows the flip side: an old bucket with $4,000 original cost, $3,800 of depreciation, sold for $800, produces a $600 gain — because the heavily depreciated basis was only $200. Short-life, high-depreciation assets can throw off gain on disposition even at modest sale prices. The same dynamic applies to fully bonus-depreciated 5-year components in a cost segregation study.
The Data Requirement
None of this works without component-level records. To make a partial-disposition election you need the disposed component's allocated basis and its accumulated depreciation — not just an aggregate annual depreciation total for the whole building. This is why a cost segregation schedule that itemizes components by class, basis, and placed-in-service detail is valuable years after the study: it is the ledger that makes a clean write-off (and avoids double-counting) possible.
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Two Failure Modes to Avoid
- Double depreciation: capitalizing and depreciating a replacement while still depreciating the original component you removed.
- Missed write-off: abandoning or replacing a component without claiming the remaining basis as a loss, because the records could not isolate it.
The Takeaway
If you renovate or replace major systems during your hold, talk to your advisor about a partial-disposition election before the work is capitalized — and keep your component schedule current. A component-level study is what makes the election workable; start one before the renovation is booked. The election is timing-sensitive and fact-specific; this article is informational and not a recommendation for your facts.
