Most building owners and their tax advisors miss this KILLER tax deduction. How do I know they miss it? Because they don’t call me to get these studies done. Partial Asset Disposition SHOULD be evaluated every year for every building owner whether you own commercial property or residential investment property. But that’s ONLY if you legally prefer paying LESS in INCOME TAX as well as REDUCE your recapture tax liability down the road in the event you decide to sell your building.
I just finished up one of these recently where it was $280,000 in interior improvements for an office. That seems like pretty standard stuff. Most tax professionals won’t even have this small of a project studied. It was all interior so most would just call it QIP and be done with it. (QIP is Qualified Improvement Property and gets a 15 year class life). In 2024, bonus depreciation was 60% so you could take 60% of $280,000 or $168,000 tax deduction. Awesome. The client just got a $168,000 and all it took was less than 5 minutes of his tax advisor’s time to figure that out. So it didn’t cost him much. Perhaps the tax advisor bills him $100 for his time to figure this out. Everything’s cool, right? Wrong. Wrong in a big way.
If the owner qualified for PAD – partial asset disposition – he should take PAD. (Note: there are some criteria as to if the improvement qualifies for PAD so the owner’s need to double check this with their cost seg firm and tax advisor).
In this scenario above, because the CPA was on top of his game and recalled this idea of a PAD, he reached out to discuss this particular project. We studied the improvement and did the PAD and did you know the owner ended up picking up an additional $118,000 in a deduction because he did PAD? That’s a net tax savings of about $40k after paying for the study. On top of that, since this property identified was tossed in a landfill, it gets removed from the basis of his building so when he goes to sell it, he will have less recapture tax to pay. If you don’t remove the property from your books that has been thrown away, you continue to carry something on your books that actually isn’t there any more. And you’ll end up paying more in recapture tax when you go to sell.
So in this scenario, if you don’t do PAD, not only would you be missing out on about $40k in immediate tax savings, but you’ll pay more in tax (recapture tax) when you go to sell your building.
So next time you are doing building improvement whether it’s interior or exterior and it’s over $100k, please remember to reach out and have a conversation with a cost segregation expert. These studies are not expensive. By doing them you are assuring your accounting and depreciation are being done correctly and you get some significant tax benefits both now and when you sell.
