How Partial Asset Dispositions Can Save You Thousands in Taxes

If you own and renovate rental properties, there’s a powerful but often overlooked tax strategy that could save you tens of thousands of dollars over time: Partial Asset Dispositions (PADs). While it might not sound flashy, understanding how this rule works and applying it properly can lead to substantial deductions and long-term tax savings.

Here’s what you need to know.

What Is a Partial Asset Disposition?

A Partial Asset Disposition allows you to write off the remaining value of a building component, like a roof, HVAC system, or plumbing, when it’s removed and replaced during a renovation. Rather than continuing to depreciate both the old and new components, you dispose of the old one and deduct the remaining basis all at once in the year of the renovation.

This provision was introduced in the 2014 Tangible Property Regulations, and while it often flies under the radar, it’s something we routinely implement for clients at our firm.

Why PADs Matter

Imagine this: you replace a roof that was originally valued at $10,000. Over five years, you’ve depreciated $2,000, leaving an $8,000 basis. Under PAD rules, you can immediately deduct that $8,000 instead of continuing depreciation over the remaining 22.5 years.

That’s a powerful acceleration of deductions, which can help reduce your tax bill in the current year and potentially free up cash for further investing.

How to Determine the Value of the Disposed Asset

To take advantage of PADs, you need to identify the disposed component and reasonably estimate its value. There are a few ways to do this:

• Cost Segregation Studies: The gold standard. These studies break down a property into individual components and assign values, making it easier to quantify PAD deductions.
• Detailed Records: If you’ve previously renovated the property and tracked costs accurately, you may already have what you need.
• Producer Price Index (PPI): An IRS-approved method, though it’s more complex and often not worth the time or effort compared to a cost seg study.

Timing Is Critical

To use a PAD, you must claim the loss in the same tax year that the asset was disposed. If you replace an HVAC system in 2025, you need to deduct the old system’s remaining basis on your 2025 tax return. Miss the window, and you may lose the deduction, unless special exceptions apply.

Ideal Scenarios for PADs

PADs are most valuable when applied to:

• HVAC replacements
• Roof tear-offs
• Window upgrades
• Plumbing replacements
• Partial demolitions
• Component upgrades in large residential or commercial properties

That said, it applies to single-family rentals too, so don’t overlook this even if you have a smaller portfolio.

Passive vs. Non-Passive Treatment

As with other real estate deductions, PAD-related losses are typically passive unless you qualify for:

• Real Estate Professional Status (REPS)
• Short-Term Rental Loophole
• Special Loss Allowance

Even if you’re a passive investor, PADs can still help offset passive income or gains from property sales.

Real-World Case Studies

We implement PADs regularly. Here are a few real examples:

• $15,000 plumbing deduction on a 2025 return
• $12,000 HVAC write-off in 2024
• $4,000 roof deduction
• $10,000 roof removal deduction
• $2 million+ in deductions found during a review of a large commercial portfolio

The numbers add up quickly, especially with larger properties or portfolios.

How to Know If You’re Missing PAD Opportunities

Here’s a quick tip: Check your depreciation schedule. If you see new improvements being capitalized (e.g. new HVAC or roof), but no corresponding disposition, you may be missing out on deductions.

And going forward, if you’re doing any renovation work, proactively talk to your CPA about PADs. The more extensive the renovation, the more opportunity you may have.

Most CPAs Miss This. Don’t Let Yours Be One of Them

In reviewing hundreds of returns each month, we’ve found that 98% of traditional CPAs do not take advantage of PADs. It’s often considered too nuanced or buried too deep in the tax code.

Even some tax strategy-focused firms overlook it. That’s why working with a team who lives and breathes real estate taxation is so critical.

Final Thoughts

Partial Asset Dispositions may not make headlines, but they can make a real difference in your tax strategy. If you’re renovating, upgrading, or even partially demolishing rental property assets, PADs offer a way to accelerate deductions and improve cash flow.

If you’re not sure whether your current tax provider is capturing this opportunity, it may be time to have that conversation or work with a team that understands how to put every regulation to work for you.

Ready to explore whether this and other strategies can work for you? Book a free 30-minute discovery call through the link. We’d love to learn more about your situation and help you maximize your tax savings.

Transcript

Introduction to Partial Asset Dispositions (PADs)

Thomas Castelli [00:00]

Thanks for tuning into this week’s episode. Today, we’re diving into Partial Asset Dispositions (PADs), a powerful but underutilized tax strategy that can help save tens or even hundreds of thousands in taxes over time.

What is a Partial Asset Disposition?

Thomas Castelli [01:10]
PADs stem from the Tangible Property Regulations introduced in 2014. While not a flashy topic, they play a big role on the compliance side of real estate tax strategy.

Ryan Carriere
A PAD occurs when you dispose of a component of a property, like an old roof or HVAC system, and replace it with a new one. The IRS allows you to recognize a loss on the disposed portion without selling the entire property.

Accelerating Deductions with PADs

Thomas Castelli [02:48]
Let’s say you’re depreciating a roof over 27.5 years. If you replace it, instead of continuing to depreciate both roofs, PAD allows you to write off the remaining value of the old one all in the year of disposal.

Ryan Carriere
For example, if a roof originally cost $10K and you’ve depreciated $2K, you still have $8K in basis. Replacing it with a $15K new roof? You get to immediately deduct the remaining $8K of the old one.

Key Points When Using PADs

Thomas Castelli [06:07]

• Applies to assets used in a trade or business, like real estate.
• You must identify the component being disposed and its cost (or a reasonable estimate).
• Best way to identify component values? Cost Segregation Studies.
• Other methods: Historical records or Producer Price Index (complex and tedious).
• The loss must be claimed in the year of disposal. If you dispose of an HVAC in 2025, you must claim the PAD in 2025.

Ideal Use Cases for PADs

Thomas Castelli [15:32]

PADs are useful when replacing:

• HVAC systems
• Windows
• Plumbing systems
• Partial demolitions
• Component upgrades in large residential or commercial buildings
  Applies to single-family rentals too.

Passive or Non-Passive Losses?

Thomas Castelli [16:25]

PAD losses follow the same rules as other real estate losses:

• Passive unless you qualify for Real Estate Professional Status, Short-Term Rental Loophole, or the Special Loss Allowance.
• Still beneficial for passive investors to offset rental income or future capital gains.

Case Studies from the Firm

Ryan Carriere [18:19]
Here are a few recent examples of PADs we’ve worked on:

• $15K plumbing write-off for 2025
• $12K HVAC write-off in 2024
• $4K roof deduction
• $1K deduction on a passive property
• $10K roof write-off
  • Each case varies depending on the size and cost of the component.

Thomas Castelli:
We had one large client with over $2 million in write-offs across their commercial portfolio from previously missed PADs.

Why Most CPAs Miss This

Thomas Castelli [21:45]
Most local or traditional CPAs don’t apply PADs, even if they’re aware of cost segregation, bonus depreciation, or REPS. It’s too nuanced for many and rarely applied unless the CPA is actively engaged in real estate tax strategy.
We review 350–400 tax returns per month and see this missed in 98% of cases by traditional firms.

How to Know If PADs Were Missed

Ryan Carriere, CPA [24:25]
Check your depreciation schedule. If you see a newly capitalized asset (like a new roof), that’s a clue. Ask your CPA if the old component was properly disposed of and written off.

Thomas Castelli
And going forward, if you’re doing any renovation or replacement, be proactive. The more extensive the renovation, the more potential PAD benefits.

Closing Thoughts

Thomas Castelli [26:00]
PADs are often overlooked, but they can be very powerful. If you want to ensure your tax team is capturing these opportunities, work with a firm that does this routinely.

You can book a free 30-minute discovery call to see if we’re a good fit.

Thanks for tuning in. We’ll catch you next week on the Tax Smart REI Podcast.

Disclaimer: This podcast summary and transcript were partly generated and may contain some errors or miss key points from the audio recording.