Partial asset disposition can save property owners money—and cost segregation helps

There are many ways commercial property owners can save money on taxes, some of which can be easily overlooked. If you’ve recently done a renovation or remodel, you have the opportunity to save extra on your taxes by using a partial asset disposition, but that opportunity could easily slip by.

Read this article to learn more about partial asset disposition, when you should consider doing it, and how cost segregation helps.

 

What is a partial asset disposition?

 

 

When a building owner removes property components or items during a renovation or remodel, a partial asset disposition (PAD) allows them to take the remaining depreciable basis of those items as an expense on their tax return. In addition, it allows the property owner to count the cost of removing those components as an expense.

 

 

For example, if you own an office building and recently replaced the carpeting throughout the entire building, you could expense the remaining depreciation of the existing carpeting that you haven’t taken yet. You can also expense the cost of removing that old carpet.

Remember that partial asset disposition is only available to you during the tax year that the remodel or renovation took place. If you overlook that on your next tax return, you’ll never be able to claim that expense down the road.

 

Who should consider doing a PAD?

If you’ve recently done work on your investment property, there’s a good chance you could benefit from a partial asset disposition. That holds true for any investment property type, including residential, commercial, and industrial.

In particular, those who have done the following in the current tax year should be considering a PAD on their next return:

  • Businesses that replaced old equipment with new equipment, or significantly refurbished equipment with new components.
  • Property owners who have done any renovations or improvements to their properties.
  • Property owners who have demolished and then improved their buildings.

The typical components within a building that qualify for partial asset disposition include, but are not limited to:

  • Lighting
  • Parking lots
  • Roofing
  • Flooring
  • Common areas
  • HVAC systems
  • Paint
  • Driveways
  • Windows
  • And anything else that can be replaced and/or improved

 

How do you do a partial asset disposition? Where cost segregation comes into play

To perform a partial asset disposition, you need to know the value of the building components you’re replacing and their remaining depreciable tax basis. In addition, you will need to know what it costs you to remove those components.

If you haven’t done a cost segregation study, you might not have this information readily available. That’s because instead of depreciating each property component, you’re taking the standard depreciation for your building, which is typically 37 years for commercial investment properties.

When you have a cost segregation study, PAD becomes much easier. The study will break down each of your building components into different depreciation periods for different property types such as personal property, building, land, etc. These periods will be either 5, 7, or 15 years, or the standard 37 years. In addition, the study will estimate the cost of each property component, ideally using the RSMeans database, which is the gold standard for construction cost estimating.

Let’s go back to that office building carpeting replacement example. If you have that study in hand, you have everything you need to complete a PAD on your next tax return:

  • The estimated value of the old carpeting.
  • The remaining depreciable tax basis that the carpeting had left on future tax returns.
  • The cost of removing the carpeting (this isn’t from the cost segregation study, but everything else is).

With this information from the cost seg study and the contractor you used to remove the carpeting, you could claim both the remaining depreciable tax basis and that removal cost as an expense on your next tax return. This would further increase your cash flow for the building, in addition to the accelerated depreciation expenses you’re claiming from other property components—thanks to the same cost seg study.

 

 

Cost segregation + partial asset disposition = maximum savings

If you’ve recently renovated your property but haven’t done a cost segregation study yet, now could be an excellent time to pull the trigger because you can enjoy the tax savings from both the study and the PAD.

Still, you should consult with your CPA on applicable tax laws and potential property tax reevaluations that could impact your future property taxes if you do this. Regardless, this is worth looking into and could result in major savings if you are in this situation.

Interested in learning how much you could save from a cost segregation study (in addition to a PAD)? Check out our free tax refund estimator to get a reasonable estimate of how much a cost seg study could save you.

About Author

Richard Bourgault

Graduating from Georgia Tech with a degree in Electrical Engineering, Richard has gained over a decade of expereince in Cost Segregation coupled with software UX.

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