Commercial real estate owners have two powerful tools to accelerate deductions when they renovate or refresh a building. Partial Asset Disposition (PAD) lets you write off the remaining basis of components you remove. Qualified Improvement Property (QIP) lets you rapidly expense many interior remodel costs. Used together, and guided by an engineering-based cost segregation study, these strategies can turn routine capital projects into significant tax savings.
What is Partial Asset Disposition (PAD)?
PAD is an election that allows you to recognize a loss on the portion of a building you retire, remove, or abandon during an improvement. Instead of continuing to depreciate an old component you no longer own in substance, you can deduct the remaining undepreciated basis in the year you dispose of it.
When PAD typically applies
- Replacing a roof or roofing membrane
- Swapping packaged rooftop HVAC units
- Removing and replacing interior lighting
- Demolishing interior finishes during a tenant buildout
- Milling and resurfacing an asphalt parking lot
- Replacing electrical panels or distribution runs
- Removing built-in millwork, partitions, or ceilings during renovations
Why PAD matters
- You avoid “ghost depreciation” on assets that no longer exist
- You accelerate a one-time deduction equal to the retired component’s remaining basis
- You clean up fixed asset records so future depreciation is accurate
What qualifies for PAD
- The disposed component must be part of a larger asset, usually your nonresidential building
- You must be able to determine the retired component’s cost and its accumulated depreciation to compute the remaining basis
- The disposition occurs in the tax year for which you claim the PAD election
Cost segregation is often the only practical way to credibly assign cost and basis to the retired pieces so you can support the PAD deduction.
What is Qualified Improvement Property (QIP)?
QIP is any improvement made by the taxpayer to the interior of an existing nonresidential building, placed in service after the building’s original placed-in-service date.
Includes
- Interior drywall, ceilings, and interior doors
- Interior lighting and branch wiring serving the interior
- Interior plumbing and mechanical distribution
- Interior finishes and nonstructural partitions
Does not include
- Enlargement of the building
- Elevators and escalators
- The building’s internal structural framework
- Improvements to the exterior of the building or to parking lots, site utilities, or roofing
Recovery and bonus treatment
- QIP is 15-year MACRS property, generally eligible for bonus depreciation
- Under current law, 100% bonus depreciation has been reinstated for eligible property placed in service on or after January 19, 2025, which may include QIP when other bonus rules are met. For projects before that date, bonus percentages may differ by year
- If bonus is not used, QIP still receives accelerated MACRS over 15 years relative to 39-year building property
A cost segregation study helps separate what is QIP, what is 5-, 7-, or 15-year personal property, and what remains 39-year building property.
How PAD and QIP Work Together with Cost Segregation
Renovations create two tax opportunities:
- Write off the old components you remove via PAD
- Accelerate the new interior improvements via QIP (often with 100% bonus where applicable)
An engineering-based cost segregation study from CSSI maps both sides:
- Before-and-after analysis to quantify the cost and remaining basis of retired components for PAD
- Precise scoping to tag qualifying interior costs as QIP, and to carve out shorter-life personal property within the renovation (casework, certain specialty lighting, decorative millwork, dedicated process electrical, and more)
- Documentation your CPA can rely on to support the PAD election and QIP classification
Practical Examples
1: Tenant refresh
- Project: Demolition of interior partitions, new ceiling grid and tiles, LED lighting, new VAV boxes, carpet, and paint
- PAD: Remaining basis of the removed partitions, ceiling materials, and old lighting is expensed
- QIP: New interior finishes, lighting, and HVAC distribution qualify as QIP and may be fully expensed under bonus where eligible
- Bonus carve-outs: Certain specialty fixtures can qualify as 5- or 7-year property separate from QIP
2: Roof and RTU replacement
- Project: Remove old roof membrane and replace rooftop units
- PAD: Remaining basis of the old membrane and RTUs is deductible
- QIP: Roofing is not QIP. New RTUs typically remain 39-year structural components unless they meet criteria for shorter life, but PAD still delivers an immediate deduction on the removed units
3: Lighting retrofit
- Project: Remove fluorescent troffers and ballasts, install LEDs
- PAD: Remaining basis of removed fixtures is deductible
- QIP: New interior lighting generally qualifies as QIP and may be bonus-eligible
4: Parking lot mill and overlay
- Project: Mill 2 inches of asphalt and overlay
- PAD: Remaining basis of the milled layer can be expensed
- QIP: Site improvements like parking lots are not QIP, though they are 15-year property and may be bonus-eligible if other rules are met
When to Consider PAD and QIP
- You are planning or completing a renovation, refresh, or tenant improvement
- You recently replaced systems like lighting, HVAC distribution, or interior finishes
- You want to clean up fixed asset schedules that still carry legacy components
Tip: The optimal time to engage CSSI is before construction begins or as soon as scope is defined. Early involvement lets us set up cost tracking so your contractor’s pay apps and change orders align to PAD and QIP categories.
Documentation Checklist
- Original building cost detail or prior cost segregation report, if available
- Contractor contracts, schedules of values, change orders, and pay applications
- Demolition logs or scope sheets identifying what was removed
- In-service dates for new improvements
- Fixed asset register and accumulated depreciation to date
Common Pitfalls to Avoid
- Treating all renovation costs as 39-year building property
- Failing to quantify the retired portion, which forfeits the PAD deduction
- Commingling interior and exterior costs, which can jeopardize QIP treatment
- Missing the PAD election on the timely filed return for the year of disposition
- Insufficient records to support cost and basis estimates
How CSSI Helps
CSSI’s engineering-based studies have supported over 55,000 projects across asset classes. We:
- Identify and substantiate retired components for PAD
- Classify new interior work as QIP where eligible and separate shorter-life personal property
- Produce a clear report and auditor-ready workpapers your CPA can plug into the return
Quick Decision Guide
- Did you remove or demolish building components this year?
Yes → Consider PAD for the remaining basis of what was removed - Did you add or replace interior improvements in a nonresidential building?
Yes → Evaluate QIP eligibility and bonus depreciation applicability - Do you have detailed costs?
If no → A CSSI study can defensibly estimate and allocate costs and basis
Let’s Maximize Your Renovation ROI
If you have a recent or upcoming project, send us the scope and timeline. We will review for PAD, QIP, and broader cost segregation opportunities, then provide a clear savings estimate and engagement plan.
