Partial Asset Disposition
Partial Asset Disposition (PAD) Elections: Complete Strategy Guide with 2025 Tax Updates
Partial Asset Disposition (PAD) elections allow taxpayers to write off the remaining basis of building components when they're disposed of during renovations or replacements. This election must be made in the tax year the disposition occurs and offers powerful opportunities when combined with the newly restored 100% bonus depreciation for property acquired after January 19, 2025.
1. Legal Foundation and Requirements
Regulatory Basis
Treasury Regulation 1.168(i)-8: Governs disposition regulations
Treasury Regulation 1.263(a)-3: Defines "unit of property" rules
Election made via statement attached to tax return (Form 3115 may be required for method changes)
Critical Timing Rule
Disposition must occur in the tax year
Election made on the tax return for that year (by due date including extensions)
No retroactive elections - missing the deadline forfeits the opportunity
Limited relief available through accounting method changes in certain circumstances
2. What Qualifies for PAD
PAD applies to structural components and building systems that constitute separate "units of property":
Qualifying Building Components:
HVAC systems (heating, cooling, ventilation)
Roofing systems (complete roof assemblies)
Plumbing systems
Electrical systems
Elevators and escalators
Fire protection systems
Structural framework components
Important Limitations:
Must be structural components of the building structure
Interior finishes typically don't qualify unless they're integral building systems
Lighting fixtures generally don't qualify as separate units of property
Component must be permanently withdrawn from use (not just replaced)
Documentation Requirements:
Contemporaneous records of what was removed and when
Engineering or contractor documentation of disposal
Clear nexus between original cost basis and disposed components
3. Revolutionary 2025 Tax Changes
The "One Big Beautiful Bill Act" (OBBBA), signed July 4, 2025, permanently restored 100% bonus depreciation for qualified property acquired and placed in service after January 19, 2025. This creates unprecedented opportunities when combined with PAD elections.
Key 2025 Updates:
100% bonus depreciation permanent for property acquired after January 19, 2025
Section 179 limits increased to $2.5 million (phaseout at $4 million)
Qualified Production Property gets 100% deduction for manufacturing facilities
Binding contract rule: Property must be under contract after January 19, 2025, to qualify
4. Strategic Integration: PAD + Cost Segregation + Bonus Depreciation
The Triple Play Strategy:
Step 1: Cost Segregation at Acquisition
Immediately perform cost segregation study on newly acquired property
Identify and value all building components (HVAC, roofing, electrical, etc.)
Create detailed baseline for future PAD elections
Step 2: PAD Election During Renovations
When replacing qualified components, elect PAD to expense remaining basis
Deduct undepreciated basis immediately in year of disposal
Step 3: 100% Bonus Depreciation on Replacements
New replacement components qualify for 100% bonus depreciation
Must meet acquisition and placed-in-service requirements after January 19, 2025
Example: Maximum Tax Benefit
Property Acquired: March 2025 for $8,000,000 Cost Seg Results: HVAC system valued at $600,000
Renovation in November 2025:
PAD Election: Expense $590,000 remaining basis of old HVAC
100% Bonus: Immediately deduct $750,000 cost of new HVAC system
Total First-Year Deduction: $1,340,000 instead of ~$34,000 under normal depreciation
5. Critical Timing Considerations
Contract Date Requirements
Property must be acquired under a binding written contract dated after January 19, 2025, to qualify for 100% bonus depreciation. This applies to:
Initial property purchases
Major renovation contracts
Equipment acquisition agreements
Placed-in-Service Dates
January 1-19, 2025: 40% bonus depreciation
January 20, 2025 and later: 100% bonus depreciation (if contract signed after Jan 19)
Year-End Planning
Complete major dispositions before December 31 to maximize current-year benefits
Coordinate renovation timelines with tax year-end
Document disposal dates carefully for PAD elections
6. Enhanced Documentation Requirements
For PAD Elections:
Detailed removal documentation (contractor reports, photos, invoices)
Engineering studies confirming what was disposed of
Clear tracking from original cost seg to disposed components
Contemporaneous records (not reconstructed later)
For 100% Bonus Depreciation:
Binding contract dates (must be after January 19, 2025)
Placed-in-service documentation
Cost segregation reports identifying qualified property
Proper classification of building vs. personal property
7. Common Pitfalls and Risk Management
Timing Failures:
Missing PAD election deadline (cannot be corrected)
Incorrect placed-in-service dates for bonus depreciation
Contract signed before January 19, 2025 (disqualifies from 100% bonus)
Classification Errors:
Treating non-qualifying improvements as structural components
Inadequate documentation of actual disposal
Double-dipping between PAD and other deductions
Audit Considerations:
IRS scrutiny of aggressive PAD positions
Need for professional engineering support
Contemporaneous documentation requirements
8. State Tax Conformity Issues
Many states don't conform to federal bonus depreciation rules, creating complexity:
Planning Considerations:
Review state-specific bonus depreciation conformity
Consider timing differences between federal and state benefits
May need separate depreciation schedules for state purposes
Some states may allow Section 179 but not bonus depreciation
9. Advanced Strategies
Multi-Year Planning
Stagger renovations across tax years for optimal benefit timing
Consider income leveling between years
Plan around other significant income events
Election Flexibility
Taxpayers can elect 40% bonus depreciation instead of 100% in the first year for income management purposes
Qualified Production Property
New 100% deduction for manufacturing facilities with construction beginning between January 19, 2025, and January 1, 2029
10. Action Checklist for Property Owners
For Recently Acquired Properties (2025):
[ ] Verify contract date - must be after January 19, 2025, for 100% bonus
[ ] Schedule cost segregation study immediately after acquisition
[ ] Document all building systems and components with values
[ ] Plan renovation timeline to optimize tax year benefits
[ ] Coordinate with CPA on PAD election requirements
For Planned Renovations:
[ ] Document existing conditions before renovation begins
[ ] Maintain detailed removal records (photos, contractor reports)
[ ] Track renovation timeline for placed-in-service dates
[ ] Prepare PAD election documentation for tax return
[ ] Coordinate bonus depreciation on new components
Professional Team Requirements:
[ ] Tax advisor experienced with PAD elections and cost segregation
[ ] Cost segregation specialist for component valuations
[ ] Engineer or contractor for disposal documentation
[ ] Legal counsel for complex transactions
11. Bottom Line: Maximum Tax Benefits
The combination of PAD elections with restored 100% bonus depreciation creates unprecedented opportunities for property owners undertaking renovations in 2025 and beyond. Key success factors:
Immediate action on cost segregation for properties acquired after January 19, 2025
Meticulous documentation of all disposals and replacements
Strategic timing of renovations to maximize current-year benefits
Professional coordination between tax, engineering, and legal advisors
Potential Impact: A $10 million property renovation could generate $2-4 million in additional first-year deductions compared to traditional depreciation methods.
The window for maximum benefit is now - properties must be acquired and improvements made under contracts signed after January 19, 2025, to qualify for the full benefits of this enhanced tax planning strategy.
This guide provides general information only. Consult qualified tax professionals for property-specific advice and current regulatory updates.
