Under the “partial disposition rule,” if you replace a roof (or other structural component in a building such as an elevator), you can claim a tax deduction equal to the remaining tax basis (undepreciated cost) of that roof you replaced.  You then capitalize the cost of the replacement roof, elevator or other component and begin to depreciate it. You must elect to use the partial disposition rule to take this deduction, but you make the election simply by claiming the loss on your tax return for the year and by beginning to depreciate the replacement roof. Without the partial replacement rule, you would need to continue to depreciate the old roof over its remaining useful life (in addition to depreciating the new roof). Obviously, the ability to take a loss for the old roof can significantly increase your deductions for the year of replacement.

There is another benefit to the partial disposition rule.  By deducting the loss on partial disposition rather than continuing to depreciate the property, you can reduce the tax rate from 25% to 20% on a portion of the gain from a sale of the property.  This is because the portion of gain taxable at 25% which is known as “unrecaptured 1250 gain” is equal to the amount of depreciation previously deducted for the property. The loss that you deduct under the partial disposition rule is not depreciation.  Consequently, any gain attributable to the reduction in basis from deducting that loss is not included in the unrecaptured section 1250 gain and is taxable at 20% rather than 25%.

Bottom Line:  By electing to use the partial disposition rule you can accelerate deductions with respect to structural components that you replace and potentially reduce the tax rate applicable to some of the gain on a subsequent sale of the property.