T.D. 9689 — Final MACRS Disposition Regulations

Where this comes from

Before 2014, the rules on what happened when you replaced a building component were murky. Some owners simply left the old component on the books and kept depreciating a cost that no longer existed. That was obviously wrong, but there was no clear rule forcing the issue.

Treasury Decision 9689, finalized on August 18, 2014, and effective January 1, 2014, fixed that. It published the final version of Treasury Regulation Section 1.168(i)-8, which covers the retirement or disposal of a structural component from a MACRS asset. A companion set of rules in Section 1.168(i)-1 covers general asset accounts, which is a separate topic.

What it established

Under these regulations, a building and its structural components together make up one depreciable asset. When you retire part of that asset, such as replacing a roof or tearing out old plumbing, you are allowed to recognize a loss on the part you removed. You write off the remaining basis in the year you retire the component.

The regulation also gives you a set of accepted methods for computing that basis. You can use the original cost of the component when it was first installed. You can use a pro-rata share of the total building cost based on the component's share of the original construction. You can use a discounted-cash-flow approach. Or you can use any other method that is systematic and supported by the facts. The key is that the method must be reasonable and consistently applied.

How it shows up in a study

A cost segregation study identifies each major building system and assigns it its own cost and depreciation schedule. The carpet, the HVAC units, the electrical panels, the specialty plumbing, the finishes. Each one gets tracked individually.

When you later renovate and replace one of those components, you already know what basis was left in the old one. The study did the work. The partial-disposition election becomes simple: look up the component in the study, find the remaining basis, and write it off in the year you retire it.

Without a study, you have one big number for the whole building and no clean way to carve out the individual piece you replaced. The election is technically available, but most owners leave it on the table because they cannot support the basis calculation.

What it does not mean

This regulation works together with the general asset account rules in Section 1.168(i)-1. If you have pooled building components into a general asset account, the no-loss rule in that regulation can block the partial-disposition election. The sequence of how your assets are tracked matters before you plan around this strategy.

The election also requires that you actually retire the component. You cannot take a loss for a roof you painted or patched. The component has to be physically replaced and disposed of. Documentation of the demolition or removal is part of the record you need to support the deduction.