Partial Asset Dispositions and Real Estate Sales

The building is one asset, so a retired roof keeps depreciating unless you elect otherwise

Reg. section 1.168(i)-8(c)(4)(ii)(A) treats each building, including its structural components, as a single asset for disposition purposes. Replacing a roof, a boiler or an elevator is therefore not a disposition by itself. Example 1 of the regulation says it plainly: when an owner replaces one of four elevators and makes no election, depreciation continues on the cost of the building, including the retired elevator, and no loss is recognized.

The replacement is a separate asset. If the new roof has to be capitalized, it starts its own 27.5-year or 39-year schedule, so without the election the owner depreciates two roofs at once: the one in the dumpster and the one on the building. These are the ghost assets that turn up in a pre-sale review of a fixed asset schedule.

Some partial dispositions happen automatically. Under paragraph (d)(1), a casualty, a sale of a portion of an asset, a transfer of a portion in a section 1031 or section 1033 transaction, and certain transfers under section 168(i)(7)(B) are dispositions whether or not you elect. For everything else, including the ordinary retirement of a worn-out component, the election is the only route.

The election is made on the return for the replacement year, and a missed year generally stays missed

Paragraph (d)(2)(ii) requires the election by the due date, including extensions, of the original federal return for the year the portion is disposed of. You make it simply by reporting the loss on that return; the Form 4797 instructions ask you to write 'Partial Disposition Election' in the description of the asset. There is no separate statement.

The regulation says the election may not be made through an application for change in accounting method, with two exceptions. Paragraph (d)(2)(iii) allows a Form 3115 when an IRS examination disallows a repair deduction for the replacement and capitalizes it instead, and paragraph (d)(2)(iv) gave a transition rule for 2012 and 2013 returns. Revoking the election requires a private letter ruling.

The timing matters in 2026. The IRS extension rules give individuals until October 15 to file, so a component replaced in 2025 can still be elected on an extended 2025 return that has not yet been filed. That is a different fix from claiming depreciation you never took at all, which Form 3115 catch-up depreciation handles.

Electing changes how the replacement is treated and requires a basis for the old component

If you deduct a loss on the retired component, Reg. section 1.263(a)-3(k)(1)(i) treats the replacement as a restoration that must be capitalized. You cannot both write off the old roof and expense the new one as a repair, so the election is for owners already capitalizing the work.

The loss is the adjusted depreciable basis of the retired portion. Under paragraph (e)(2), a physical abandonment produces a loss equal to that basis; under paragraph (e)(3), other retirements produce a loss equal to basis over fair market value. Most owners never recorded what the original roof cost, and paragraph (f)(3) accepts any reasonable method: discounting the replacement cost back with the Producer Price Index for a like-for-like restoration, a pro rata allocation by replacement cost, or a study allocating cost to components.

The adjusted basis must include the share of any bonus depreciation claimed on the asset that relates to the retired portion. A cost segregation study done at purchase gives the cleanest component costs.

Worked example: a retail building's roof replaced before a planned sale

Hypothetical, round figures. An owner placed a retail building in service in 2014 with $2,000,000 of building basis, of which a reasonable method assigns $200,000 to the roof. The roof depreciates at about $5,100 a year on the 39-year schedule. In 2025 the owner replaces it for $300,000 and capitalizes the new roof.

By the end of 2025, roughly $56,000 has been taken on the old roof, leaving about $144,000 of basis. With the election on the 2025 return, that $144,000 is deducted as a loss for 2025 and depreciation on the old roof stops. Without it, the old roof keeps adding about $5,100 a year of depreciation, and its remaining basis only comes off when the whole building is sold or exchanged.

The election does not create new deductions; it moves them earlier and ends depreciation that would otherwise sit in the depreciation recapture layer at sale. Run your own numbers with your CPA.

In a sale or exchange, cleaning up the schedule first gives a truer basis and a cleaner Form 4797

When the building is sold, the whole asset is disposed of, so any ghost component's remaining basis reduces the gain at that point anyway. The value of an earlier election is timing: a loss in the replacement year instead of at sale, and fewer years of depreciation on a component you no longer own. Checking the schedule before listing also catches components retired by casualty, which paragraph (d)(1) treats as dispositions automatically and which should already be off the books.

In a 1031 exchange, the relinquished building's adjusted basis carries into the replacement under section 1031(d), so a lower basis from an earlier write-off means a larger deferred gain, not a larger tax today. A replacement held through a traditional DST leaves component decisions to the trust's sponsor rather than to you. Basis in replacement property after a 1031 shows how the carried basis is depreciated.