A Tax Benefit Twist on Cost Segregation

I’m sharing this because it may give another rental property owner a tax question worth asking.

Five roof replacements resulted in a $9,102 tax deduction for our rental portfolio.

And the deduction had nothing to do with depreciating the new roofs.

The new roofs were straightforward. They were capital improvements, so we capitalized and depreciated them.

The more interesting question was:

What happened to the old roofs?

Physically, they were gone.

But part of their original cost was still embedded in the tax basis of each building and continuing to be depreciated.

That led me to a question that I don't hear discussed nearly as often as cost segregation:

Why am I still depreciating an asset that I no longer own?

I discussed it with my business tax accountant, and we agreed it was appropriate to remove the remaining basis associated with the old roofs.

The difficult part was determining the basis, because none of the properties had a separate asset on the depreciation schedule called “roof.”

So I used our own portfolio data.

I compared the actual cost of five roof replacements with the insured replacement cost of the buildings. The roofs averaged approximately 5.5% of building replacement value. Using that as the basis for the estimate, the remaining cost associated with the old roofs was removed from the building basis.

The final return reported a combined $9,102 loss on Form 4797.

Has anyone else used a partial disposition when replacing a major component of a rental property?

This is an example from my own portfolio, not tax advice. Partial dispositions, basis allocations, and depreciation treatment depend on the specific facts and applicable tax rules.