When thinking of cost segregation studies, most investors think of its main benefit of accelerating depreciation deductions to reduce tax liability. While that’s the widely known use for cost segregation, there’s another benefit that often gets missed: Partial Asset Dispositions (PAD).
PAD is a powerful tool in fixed asset tax planning. When used right, it can create large deductions and even create permanent tax savings.
What is a Partial Asset Disposition?
The IRS introduced PAD under the 2014 Tangible Property Regulations. It lets you write off the remaining value of an asset when you remove or replace it.
The rule is simple: you should not keep depreciating something that no longer exists.
Here’s a common example. A building owner replaces a roof on their building. The old roof is gone, but it often stays on the depreciation schedule. That means the owner is depreciating two roofs at once.
PAD fixes this. You write off the remaining value of the old roof in the year you remove it. Then you capitalize and depreciate only the new roof.
What are the Benefits of PAD?
PAD can improve both short-term and long-term tax results. Unlike cost segregation alone, which mostly defers taxes, PAD can create permanent savings.
Keep in mind: you must claim the loss in the year you dispose of the asset. This is known as a “use it or lose it” strategy, where if you don’t take advantage of it, the opportunity is gone forever.
The main benefits of PAD include:
- Current year write-offs: Taxpayers can claim a loss deduction for the asset removed in the current year, which can lower taxable income
- Reduction of Depreciation Recapture: PAD removes the asset and its depreciation from the fixed schedule, which reduces the amount of depreciation recapture at time of sale of the property.
- Accurate reporting: Utilizing PAD ensure that’s the fixed asset schedule is accurate, and depreciation is being reported at the correct amount.
When to Take Advantage of Partial Asset Dispositions
PAD applies when you replace or remove parts of a property, such as:
- Major Component replacements
- Roofs
- HVAC systems
- Electrical systems
- Plumbing systems
- Exterior siding
- Renovations and Tenant Improvements
- Walls
- Floors
- Ceilings
- Interior finishes
- Windows
- Doors
- Value-Add Projects
How do Cost Segregation Studies Help?
The biggest issue for PAD with taxpayers is determining how much to write off for the asset that was removed. Without a cost segregation study, this is hard to do and may draw IRS scrutiny. You need a clear and supportable way to assign value.
There are a few options without a study such as the Producer Price Index method but utilizing cost segregation studies is the most accurate approach for PAD. Other methods tend to be difficult, complex, and time consuming.
A high-quality cost segregation study will include a listing of components at the property in a detailed manner. This includes a listing of all components, its associated cost basis, and depreciable life.
Once an asset is removed, a tax preparer can refer to the cost segregation study to determine the basis of the asset that was removed. Essentially, a cost segregation study is the “roadmap” to determine the amount that is eligible for the write-off when the asset is removed.
A strong provider can also help you apply PAD and calculate the correct deduction.
Example of PAD:
A taxpayer purchased an office building in 2021 for $2.5 million and had a cost segregation study completed on the property.
In 2025, the taxpayer had to replace the entire HVAC for the current tenant at a cost of $144,000.
The cost segregation study accurately identified the HVAC system to have an original basis of $102,000 with a depreciable life of 39-years. At the time of disposition, the roof had a remaining undepreciated basis of $91,539.
When the HVAC system was removed, the taxpayer was able to write off the remaining $91k of the assets in the current year, which resulted in roughly $30k of tax savings.
Additionally, our cost segregation team was able to identify $87,000 of the new HVAC system to be eligible for Qualified Improvement Property, which was eligible for 100% bonus depreciation, further reducing the taxpayer’s tax liability.
Wrapping Up
If you have replaced or upgraded parts of a property, there’s a strong chance you qualify for PAD, even if you did not realize it at the time. Many property owners miss this because they focus only on the new asset being added, not the old one being removed.
Timing also matters. PAD is a “use it or lose it” rule, so it requires coordination between your construction activity and your tax reporting. Keeping clear records of when assets are removed and replaced is key.
If you’ve had recent or ongoing property improvements, it makes sense to review your fixed assets and see where PAD may apply. Reach out to the experts at Align to see if there’s eligibility.
