The Partial Disposition Election Before a Sale: Writing Off the Old Roof, HVAC or Parking Lot

What happens to the old roof by default

For depreciation, a building and its structural components (roof, HVAC, plumbing, electrical, elevators) are generally one asset. When you tear off a roof and put on a new one, the new roof is a capitalized improvement with its own schedule, but the old roof does not leave the books. Its undepreciated basis stays inside the building and keeps depreciating on the building's 27.5- or 39-year schedule, even though it is in a landfill.

A sale of the whole building eventually recovers that basis, because it lowers the gain. The partial disposition election lets you recover it now instead: you treat the retired portion as disposed of, stop depreciating it and deduct its remaining basis as a loss in the year of retirement (Treas. Reg. 1.168(i)-8(d)(2)).

When the regulation applies without an election

Some partial dispositions count automatically, election or not (Treas. Reg. 1.168(i)-8(d)(1)):

• a casualty event described in IRC 165 (storm, fire),
• a portion disposed of in a 1031 or 1033 exchange,
• a transfer described in IRC 168(i)(7)(B), and
• a sale of a portion of an asset.

Everything else, including the ordinary case of retiring a worn roof, HVAC unit, windows or a parking lot surface when you replace it, counts as a disposition only if you make the election.

The deadline that makes or breaks it

The election is made by reporting the loss on your timely filed original return, including extensions, for the tax year in which the portion was disposed of (Treas. Reg. 1.168(i)-8(d)(2)(ii)). There is no general late path:

• No Form 3115 later. The regulation says the election may not be made through an accounting method change, except where the IRS on exam disallows a repair deduction for the replacement and you then want the election for the old portion (1.168(i)-8(d)(2)(iii); Rev. Proc. 2025-23 section 6.10, DCN 198, which also requires owning the asset at the start of the year of change).
• The amended-return and two-year Form 3115 windows in the regulation applied only to 2012 and 2013 tax years (1.168(i)-8(d)(2)(iv)).
• Revocation requires a private letter ruling (1.168(i)-8(d)(2)(v)).

So for a seller, the live question is narrow: did you replace something in a year whose return is not filed yet? If the roof went on in 2026, the 2026 return (on extension, if needed) is the one chance.

Worked example: deduct now or recover at sale

Our couple replaces a roof in 2026 whose remaining basis is $120,000, in a year with $600,000 of income. The election removes the top $120,000 of that income, worth $44,621 of federal income tax and net investment income tax at 2026 rates (Rev. Proc. 2025-32).

The cost shows up at the sale. With the election, basis is $120,000 lower, and a 2028 sale after retirement costs $393,453; without it, $364,893. The difference, $28,560, is less than the 2026 saving because the deduction hit a 35% bracket while the extra gain is taxed at 20% plus the 3.8% net investment income tax. Two years of use of the money is on top. If the deduction would have landed in a low bracket, or been suspended as a passive loss until the sale, the advantage mostly disappears. Numbers are illustrative engine output from labeled assumptions.

Figuring the old roof's basis

The deduction is the retired portion's adjusted depreciable basis at the time it is disposed of (Treas. Reg. 1.168(i)-8(f)(3)). If your records do not show what the old roof cost, the regulation allows any reasonable method, applied consistently to every portion of the same asset. A cost segregation study that already priced the building's components is a common, well-documented source. Discounting the new roof's cost back to the year the building was placed in service with a price index is another approach your CPA may use.

The side effect on the replacement

If you properly deduct a loss for a component, the amount you pay to replace it is a restoration that must be capitalized (Treas. Reg. 1.263(a)-3(k)(1)(i)). In practice that matters when a replacement might otherwise have been argued as a deductible repair: you cannot take the loss on the old roof and also expense the new one. For a full roof or HVAC replacement, capitalization is usually the answer anyway, so the election tends to be a pure gain. For smaller, arguable repairs, model both.

A separate small-taxpayer safe harbor lets some owners of buildings with an unadjusted basis of $1,000,000 or less expense smaller repairs and improvements (Treas. Reg. 1.263(a)-3(h)); ask your CPA whether it applies before you choose.

How it fits with the rest of a sale plan

• Selling soon? A replacement in the sale year itself matters less: the old roof's basis offsets the gain at closing anyway, so the election mostly changes character and timing within the same return.
• Passive owners with no passive income: the loss is suspended until the sale frees it (IRC 469(g)), which removes most of the timing benefit.
• Cost segregation and missed depreciation are related clean-ups; see missed depreciation before a sale and cost segregation before a sale.
• Spreading the remaining gain: an installment sale spreads capital gain and the 25% layer across payment years, but not recapture (IRC 453(i)).

Get the Big Sale Tax Analysis to see the clean-up items and the sale modeled together.

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