Under Treasury Regulation 1.168(i)-8(d)(2), a taxpayer may treat the retirement of a component of a building as a disposition and deduct the component's remaining basis in the year it is replaced. The election is made by reporting the loss on that year's return, the basis is estimated by a reasonable method, and the replacement is capitalised as a restoration.
The tangible property regulations let you write off the component you tore out.
Under Treasury Regulation 1.168(i)-8(d)(2), a taxpayer may elect to treat the retirement of a portion of an asset (a roof, a boiler, a section of flooring, a chiller) as a disposition, recognise the remaining basis of that portion as a loss in the year of the retirement, and take it off the depreciation schedule. Without the election, a building is one asset: the old roof keeps depreciating inside the building's basis for the rest of its 39 years while the new roof is capitalised on top of it, and the same square feet of roofing are deducted twice, slowly. The election is made simply by reporting the loss on the timely filed return for the year of the disposition; no statement is required. It must be made that year, not later, except in the narrow cases Revenue Procedure 2014-54 allowed for transition.
The basis of the disposed portion is estimated by a reasonable method.
Few registers carry the roof's original cost as a separate line. Regulation 1.168(i)-8(f)(3) allows any reasonable method to determine it, and names three: discounting the cost of the replacement to the placed-in-service year using the Producer Price Index; a pro rata allocation of the building's basis by the component's share of the whole (by replacement cost or by a cost segregation study); and a study allocating the cost when the building was acquired. The method chosen, and its arithmetic, go in the file.
| Line | Amount |
|---|---|
| Building, placed in service July 2012, 39-year straight line | 2,600,000.00 |
| Roof, as a share of the building's cost (6% by a cost segregation study) | 156,000.00 |
| Depreciation on that share, July 2012 to the replacement in July 2026 (fourteen years at 4,000.00) | 56,000.00 |
| Remaining basis of the old roof, written off as a loss in 2026 under the partial disposition election | 100,000.00 |
| New roof, capitalised as a restoration, 39-year straight line from July 2026 | 180,000.00 |
The loss and the capitalisation come together.
Claiming the loss on the old roof is not free: the regulations require that the replacement then be capitalised as a restoration (Regulation 1.263(a)-3(k)(1)(i)), which it would usually be anyway for a roof. The election is most valuable where the taxpayer would otherwise have argued the replacement was a repair, and least valuable where the building is nearly fully depreciated. It has no counterpart in the financial statements under US GAAP, where the same decision is made by the capitalisation policy and the component approach the entity has adopted, and where the old roof's carrying amount is derecognised when it is replaced (ASC 360-10-40). The register handles both the same way: the building is split into components, or a component is carved out at the replacement, and the disposal is recorded as a dated event. The recapture article covers what happens when there is a gain instead of a loss.
What to record on the asset.
- The component disposed of, the date, and that the partial disposition election is being made on the return.
- The method used to determine the component's basis and the arithmetic.
- The remaining basis written off, by book, because the book and tax carrying amounts may differ.
- The replacement capitalised as a restoration, with its own placed-in-service date and, for federal, its own 39-year life.
- The building's remaining basis after the write-off, so the schedule reflects one roof, not two.
In Fixed Asset Desk: a building can be split into components at any time and a component disposed of as a partial disposal with the loss computed by book; the lifecycle page lists the split and component events.
Sources: Treasury Regulation 1.168(i)-8(d)(2) and (f); Treasury Regulation 1.263(a)-3(k); Revenue Procedure 2014-54; Internal Revenue Service practice unit, Examining a Taxpayer Electing a Partial Disposition of a Building; FASB ASC 360-10-40. Checked 20 September 2026.