Partial Asset Disposition for value-add multifamily.
When you tear out an old appliance, you don't have to leave its remaining basis stranded in the building. PAD elects that basis off the books as an ordinary loss in the year of disposition. The most-missed renovation-year deduction in MF.
From acquisition basis to ordinary loss
The disposal event lets you deduct the remaining basis of the retired components as an ordinary loss, instead of leaving that basis stranded in the building's depreciation schedule.
What PAD is and when it applies
Treasury Regulation §1.168(i)-8 governs disposition of depreciable assets, including the partial-disposition election. The rule: when a portion of a tangible-property asset (e.g., a building) is retired through replacement, the taxpayer can elect to treat that portion as a separate disposition. The remaining unadjusted basis of the retired portion is deducted as an ordinary loss in the year of disposition.
Without the election, the original asset (the entire building) continues to depreciate at its original basis even after components are physically gone — the basis sits "stranded," depreciating slowly over the 27.5-year recovery period. With the election, the retired components' basis exits the schedule immediately.
The election is made on a per-component basis on the partnership's timely-filed return for the year of disposal. It's irrevocable for that component but doesn't bind future dispositions. Most engineered cost seg studies that scope PAD pre-elect every qualifying component in the renovation.
What typically retires in MF value-add
The components that qualify for PAD in MF renovations span all three accelerated-MACRS buckets plus partial 27.5-year retirements:
- 5-year personal property — appliances (refrigerators, ranges, dishwashers, microwaves, washer-dryers), carpet and vinyl flooring, ceiling fans, cabinetry, decorative lighting, window treatments
- 15-year land improvements — asphalt and concrete paving when milled and repaved, exterior lighting when fully replaced, fencing, landscaping when redone, irrigation systems
- 27.5-year structural (partial retirements) — HVAC fan coils when fully replaced as a system, water heaters, roof segments in partial reroof, exterior envelope sections when replaced
The distinction between replacement (qualifies for PAD) and repair (currently deductible as ordinary repair under §162) matters. PAD applies to retired components; repairs apply to fixes that don't constitute disposal. Engineering judgment per component, not a blanket rule.
Calculating what each retired component is worth
The PAD deduction equals the retired component's unadjusted basis minus the depreciation already claimed on that component from acquisition through disposal. For MF value-add deals where renovation begins shortly after close, accumulated depreciation on the retired component is usually small — most of the unadjusted basis flows to PAD.
The unadjusted basis comes from the engineered allocation done at acquisition. This is why PAD modeling has to run alongside the cost seg study: the engineered allocation already broke the building into its component pieces; PAD just uses that same breakdown in reverse to identify what each retiring component was originally allocated.
Below is the typical PAD upside by renovation scope on a 142-unit Ventana-class MF:
| Renovation scope | Reno cost | PAD upside | Components |
|---|---|---|---|
| Light cosmetic refresh | $500K – $1M | $80K – $180K | Paint, flooring updates, light fixture swaps |
| Mid-tier interior | $1.5M – $3M | $220K – $420K | Full unit interiors, appliance replacement, cabinetry, in-unit HVAC |
| Full gut + exterior | $3M – $6M | $450K – $800K | Above + envelope, paving, common areas, mechanical systems |
REPRESENTATIVE RANGES FOR 100–200 UNIT VALUE-ADD MF. ACTUAL PAD UPSIDE PER-DEAL VARIES WITH COMPONENT MIX + ACQUISITION-DATE ALLOCATION.
When the disposal path beats capitalization
The two regimes apply to different sides of a renovation. §263A handles the new components being installed — those capitalize into new basis and depreciate over their recovery period. PAD handles the old components being retired — their remaining basis exits the schedule as an ordinary loss in the disposal year.
The two regimes work together: new components capitalize under §263A; old components dispose under PAD. The trap is doing only the §263A side and forgetting the PAD side — which leaves the old components' remaining basis stranded in the building's depreciation schedule, where it sits for decades earning small annual deductions instead of one large disposal-year deduction.
Why most renovations leave deductions on the table
- · Scope PAD modeling at the same engagement as cost seg — running it as a Year-2 afterthought means the engineered allocation is already locked in and disposed components are hard to reconstruct.
- · Coordinate the renovation schedule with the cost seg vendor — components have to be identified BEFORE they're physically removed; once they're in a dumpster, the documentation gets harder.
- · Document the disposal date per component (or per renovation phase). The IRS examiner will ask when each component was retired; "during the renovation" isn't specific enough.
- · Flag PAD-eligible components in the GC's demo scope-of-work so they're tracked through the renovation, not lumped into "demolition and disposal" line items.
- · Stack PAD against §1.263(a)-3 routine maintenance safe harbor — sometimes a "repair" is more valuable than a "disposal" depending on the component's remaining basis. Decide per-component, not per-renovation.
- /k1-allocation/ — where PAD lands on the K-1
- /179d-coordination/ — often runs concurrent with PAD
- /case-studies/ — Ventana PAD layer worked out
- /methodology/ — engineered allocation framework