Partial Dispositions: The Overlooked Depreciation Deduction for Apartment Renovations

Apartment investors often miss significant tax deductions from partial dispositions during renovations due to poor documentation, costing them thousands in lost accelerated depreciation. A value-add investor renovating a 20-unit apartment building with a $500,000 budget over two years typically has a cost segregation study on the original purchase. However, renovation activities generate a separate category of depreciable activity that most investors fail to track properly, according to Brian Kiczula, founder of CostSegRx.

When an investor removes assets like flooring, cabinetry, or fixtures during a unit renovation, those removed assets have remaining undepreciated value on the fixed asset schedule. A partial disposition allows the investor to write off that remaining value in the year the asset is removed. Kiczula explains that the deduction works on both sides of the renovation: accelerated depreciation on new assets and disposition write-offs on old assets. But capturing both requires detailed records of what was removed and installed—a requirement most investors fail to meet.

The typical scenario involves a contractor submitting a lump-sum monthly invoice—$10,000 for work completed—without itemizing individual components. That lump sum then gets recorded as a single capital improvement line item on the investor's books. Kiczula notes that most invoices he receives are handwritten with a single total, forcing his team to reconstruct the work after the fact. Without itemized records, short-life assets like removable flooring, appliances, and decorative lighting—which qualify for five-year accelerated depreciation—get buried in the general renovation line item and end up depreciating over 27.5 years instead.

The fix is procedural and inexpensive. At the start of a renovation project, the property owner should set up a shared spreadsheet accessible to both the owner and the contractor, requiring monthly itemization of what was removed from each unit, what was installed, and the cost of each line item. Kiczula recommends establishing this standard operating procedure at the beginning of the job, especially when working with the same contractors across multiple units. The documentation does not need to be elaborate, but it must be consistent. A contractor who logs “remodeled kitchen: $3,000 cabinets, $1,500 refrigerator, $2,000 electrical rewiring” provides the information needed for correct classification, while a lump sum of “kitchen renovation: $6,500” does not.

For investors who have already completed renovations without detailed records, the situation is recoverable but costly. Cost segregation firms can reconstruct construction cost estimates by analyzing the work done and applying industry cost data, but this is more labor-intensive and expensive. Additionally, some short-life assets will inevitably go unaccounted for. The investor still benefits from the study but cannot capture the full value they would have with proper documentation from the start.

Apartment renovation is not just a capital improvement play—when structured correctly with a cost segregation study and proper documentation, it becomes a depreciation strategy that generates deductions on both the assets being installed and those being removed. The investors capturing the full benefit are not deploying a more sophisticated tax strategy; they are simply keeping better records.