Partial Asset Dispositions
When you replace part of a building, a partial disposition election under Treas. Reg. §1.168(i)-8(d) can let you recognize a loss on the retired portion instead of leaving its remaining basis in the asset. The election is generally made on the original return.
Educational information, not tax advice.
Updated 2026-10-14
Key takeaways
- A building, including its structural components, is generally one MACRS asset.
- Treas. Reg. §1.168(i)-8(d)(2) allows an election to treat the disposition of a portion of an asset as a disposition.
- The election is generally made on the original return for the year of disposition.
- For asset classes 00.11–00.4, the replacement portion must be classified in the same class.
- Rev. Proc. 2025-23 lists DCN 205 and 206 for certain disposition method changes; Form 3115 instructions are dated December 2022.
MACRS generally treats a building, including its structural components, as a single asset. Treas. Reg. §1.168(i)-8(c)(4) states that rule, with exceptions for condominium or cooperative units and for later improvements that are themselves separate assets. Replacing a roof or an HVAC unit does not automatically take the old component’s remaining basis off the depreciation schedule.
A disposition includes a sale, exchange, retirement, physical abandonment, or destruction, and also includes a disposition of a portion of an asset in a casualty, a §1031 or §1033 event, a §168(i)(7)(B) transfer, or a sale — even without the partial-disposition election. For other transactions, a disposition of a portion of an asset is recognized only if the taxpayer makes the election under §1.168(i)-8(d)(2).
The election is useful when a roof, HVAC unit, or other component is replaced during a renovation. With the election, depreciation on the retired portion stops and a loss can be recognized. The regulation’s structure matches the IRS research summary: replacing one of four elevators is not a disposition of that elevator without the election; with the election, it is.
If the asset is in one of Rev. Proc. 87-56 classes 00.11 through 00.4, the election is available only if the replacement portion is classified in the same asset class. The election is generally made by reporting the gain, loss, or other deduction on a timely filed original return, including extensions, for the disposition year. It generally may not be made by filing Form 3115, except in the exam-adjustment situation described in the regulation.
This page is educational information, not tax advice. Identifying the remaining basis of the retired portion is a fact and accounting question for the taxpayer’s CPA. A study can help identify what was removed; the election itself is an accounting-method and return-position decision.
What is the asset
For disposition purposes, the facts and circumstances determine the asset. Items placed in service on different dates (ignoring the convention) cannot be one asset. The unit-of-property rules in §1.263(a)-3(e) do not control this determination.
Each building plus its structural components is the default asset. Later improvements placed in service after the building are separate assets, including their structural components. That is why a 2019 roof on a 2005 building can already be its own asset before any partial-disposition election is considered.
Personal-property items in classes 00.11 through 00.4, and items in most statutory §168(e)(3) categories other than building categories, are generally each a separate asset. Each desk is the asset; each computer is the asset.
Making and revoking the election
The default time is the due date, including extensions, of the original federal return for the year the portion is disposed of. The manner is to apply the regulation and report the result on that return, and, for 00.11–00.4 assets, to classify the replacement in the same class.
If the taxpayer deducted the replacement as a repair, did not elect, and an examiner later capitalizes the replacement, the taxpayer may make the election for the portion the adjustment addresses by filing Form 3115, if the taxpayer still owns the asset at the beginning of the year of change.
Revocation requires a private-letter-ruling request and the Commissioner’s consent. The election may not be revoked by filing Form 3115. The Commissioner may grant revocation if the taxpayer acted reasonably and in good faith and the government is not prejudiced.
Method-change numbers
Rev. Proc. 2025-23 lists automatic method changes for dispositions of a building or structural component (DCN 205) and for other tangible assets (DCN 206), and for partial dispositions to which an IRS adjustment pertains (DCN 198). Those titles are from the current list. Eligibility conditions are not fully restated here.
The Form 3115 instructions predate that revenue procedure (December 2022), so change numbers should be taken from the current list, not from the 2022 instructions alone. Filing decisions belong to the CPA. Rev. Proc. 2026-32 modifies parts of Rev. Proc. 2025-23 for Forms 3115 filed after September 4, 2026.
A current-year election on the original return is not a method change. Do not file Form 3115 for a timely original-return election unless a specific provision says to.
Why studies mention it
A renovation study that classifies new work can also help identify what was removed. Photographs, demolition tickets, and original cost records support the remaining-basis computation. The ATG discusses quality-study records; it is not authority for the election.
Without the election, capitalizing the new roof and leaving the old roof’s basis in the building results in two layers of basis for the same function. The regulation exists to let taxpayers take the old layer off.
CostSeg SI does not claim an operational extraction or estimating agent that computes remaining basis. Super Intelligence is proposed documentation support. The CPA computes the loss.