The IRS in its repair regulations gives you a partial disposition election that benefits you when you replace a structural component such as a roof on your office building or rental property.
Previously, when you replaced a structural component such as a roof, the old roof’s remaining depreciation continued on your books, an ugly result. But now, say thank you to the IRS.
Beneficial Change in IRS Policy
The IRS allows property owners to elect a “partial disposition” deduction. Using this election means when you replace an old roof, you can deduct the undepreciated basis of the old roof rather than continue depreciating it. This change simplifies your financials and provides an immediate tax benefit.
Advantages of the Partial Disposition Election
- Immediate deduction. With the election, you claim an immediate tax deduction for the undepreciated basis of the old component.
- Beat the recapture tax. When you eliminate the old component, you avoid the capital gains recapture tax of up to 25 percent (technically known as “unrecaptured Section 1250 gain”) when you sell the property.Â
Example
If you replace an old roof that initially cost $100,000 and has $40,000 of depreciation remaining, you can deduct this $40,000 immediately, rather than depreciating it over the remaining useful life.
You also avoid paying the unrecaptured Section 1250 gain tax on the $60,000 of depreciation you have already taken.
To wrap up, the partial disposition election presents substantial tax benefits by enabling immediate deductions and reducing potential future tax burdens. If you’re planning property upgrades, seek advice from a tax professional to ensure you’re taking full advantage of these IRS provisions.
