Renovation Cost-Seg Add-On: When You Do a Rehab Mid-Hold
How a mid-hold renovation creates a separately-depreciable asset, the partial asset disposition election under §1.168(i)-8, and a worked walkthrough.
Renovation Cost-Seg Add-On: When You Do a Rehab Mid-Hold
This tutorial covers a single mechanic: how a mid-hold renovation creates a separately-depreciable improvement that is eligible for its own cost-seg allocation, and how the partial asset disposition (PAD) election under Treas. Reg. §1.168(i)-8 lets the property owner write off the remaining basis of components removed during the rehab.
Why a renovation is its own asset
When a property owner replaces a roof, gut-renovates a kitchen, finishes a basement, or adds a primary suite mid-hold, the new investment is an improvement under Treas. Reg. §1.263(a)-3 — specifically a betterment, restoration, or adaptation. Under the regulations the improvement is treated as a separate asset placed in service in the year of completion. It has its own basis (the renovation cost), its own placed-in-service date, and its own MACRS schedule.
This matters for cost segregation because the improvement basis can be reclassified into 5/7/15-year buckets the same way the original purchase basis was — and the reclassification is generally easier on a renovation because the property owner has actual invoice detail (cabinetry, appliances, flooring, lighting, site work) instead of having to back into engineering estimates from a 20-year-old construction.
The renovation depreciates on its own line, with the bonus rate in effect in the year the improvement is placed in service, not the bonus rate that applied to the original property acquisition. A 2018 LTR that gets a 2026 kitchen renovation runs the renovation under 100% OBBBA bonus on the reclassified portion, even if the original purchase was in the TCJA window.
What the calculator's renovations field does
The questionnaire collects renovations as a list of objects:
```python renovations: list[dict] = field(default_factory=list)
[{type: "kitchen-remodel", year: 2026, cost: 80000}]
```
Each entry feeds the calculator's per-row classifier. The engine now allocates each renovation by type rather than applying a single blanket pct, using the splits that line up with documented MACRS treatment of common rehab work. The mappings (residential property unless noted):
| Renovation type | 5-yr (personal property) | 15-yr (land improvements / QIP) | Building basis (no credit) | |---|---|---|---| | Kitchen (residential) | 30% (cabinets, FF&E, decorative lighting) | — | 70% | | Kitchen (commercial) | — | 100% (QIP under §168(e)(6)) | — | | Bathroom | 50% (cabinets, fixtures, lighting) | — | 50% | | Flooring | 50% (carpet, vinyl plank, decorative tile) | — | 50% | | Pool | — | 100% (15-yr land improvement) | — | | Landscaping | — | 100% | — | | Addition (residential) | — | — | 100% (27.5-yr) | | Addition (commercial) | — | 100% (QIP) | — | | Roof | — | — | 100% (building basis) | | HVAC | — | — | 100% (no QIP under §168(e)(6) HVAC carve-out) | | Other | 20% (mixed; conservative default) | — | 80% |
Two engine guardrails worth knowing:
- 1. Combined cap. All renovation lines together are capped at 10% of depreciable basis. A $500k addition on a $1.6M commercial basis would map to 12.5% raw QIP but the engine clamps to 10%. This is a screening-calculator safety valve — a real engineering study is not bound by it.
- 2. Aggregation. Multiple rows hitting the same asset class roll up to one audit-trail line, so a kitchen + bath + flooring set produces a single 5-yr aggregate rather than three small lines.
Engineering deliverables on a real renovation usually push higher than these defaults — a fully-documented $80,000 kitchen remodel can hit 60–70% reclassifiable (cabinets, appliances, lighting, fixtures) once the engineer cites invoices line-by-line. The calculator's per-row defaults are a deliberately conservative floor.
Worked example — 2026 kitchen + bath renovation on a 2018 LTR
A property owner bought a long-term rental in May 2018 for $475,000 ($95,000 land, $380,000 improvement basis). In April 2026 the owner spends $80,000 on a full kitchen remodel ($55,000) and primary bath remodel ($25,000) before re-listing. The renovation is placed in service in May 2026.
The property owner now has two depreciable assets:
- 1. The original property — still on its 27.5-year schedule from 2018 (or, if a Form 3115 cost-seg look-back is filed, on the post-§481(a) reclassified schedule).
- 2. The 2026 renovation — a separate $80,000 asset placed in service May 2026.
Engine-side (screening, conservative): the per-row classifier maps the kitchen at 30% to 5-yr ($55,000 × 0.30 = $16,500) and the bathroom at 50% to 5-yr ($25,000 × 0.50 = $12,500). Total $29,000 of 5-yr basis under the calculator's default mappings.
Engineering-deliverable side (full study): with line-item invoices, the same $80,000 of work could realistically reclassify ~60% to 5-yr property (cabinetry, countertops, appliances, fixtures, decorative lighting, hardwood/tile flooring) — about $48,000. The remaining ~$32,000 stays on a 27.5-yr MM schedule.
At 100% bonus depreciation under IRC §168(k)(6), the reclassified bucket becomes year-1 deduction in 2026. At a 32% bracket: the engine's conservative $29,000 implies ~$9,300 year-1 federal tax effect; an engineering study at $48,000 implies ~$15,400. The spread between those two numbers is the value an engineering deliverable typically captures over a screening estimate. Both sit on top of any §481(a) catch-up filed against the original 2018 acquisition.
Try a 2018 LTR with a 2026 renovation →
The partial asset disposition election (don't skip this)
When a renovation removes components that were part of the original cost basis — the old kitchen cabinets, the old roof, the old HVAC system — the remaining basis of those components is still on the original depreciation schedule. Without an election, the property owner continues depreciating ghost basis (already-removed cabinets) for years.
Treas. Reg. §1.168(i)-8(d) offers a partial asset disposition (PAD) election. The property owner writes off the remaining basis of the removed components in the year the components are disposed. The PAD is elected on the timely-filed return (including extensions) for the year of disposition, by reducing the asset basis on Form 4562 and recognizing the abandonment loss.
For the kitchen example: if the original kitchen was conservatively allocated ~5% of the 2018 improvement basis ($380,000 × 5% = $19,000) and has accumulated 8 years of straight-line depreciation ($19,000 / 27.5 × 8 ≈ $5,527), the remaining basis is ~$13,473. A PAD election in 2026 deducts that $13,473 as an abandonment loss — on top of the cost-seg deduction on the new $80,000 renovation.
Combined year-1 effect of the renovation + PAD election (illustratively, using the engineering-deliverable side of the spread): renovation 5-year bonus ~$48,000 + PAD abandonment ~$13,500 = ~$61,500 of year-1 deduction. At 32% bracket, ≈ $19,700 of year-1 federal tax effect from the renovation event alone.
The screening calculator does not currently model the PAD election directly. It is a CPA-side decision documented on the year-of-renovation return; the calculator surfaces the renovation basis as a screening number and the property owner brings the PAD question to the CPA.
See a different renovation scenario →
What does not qualify as a separate asset
Routine repairs do not capitalize at all — they are current-year expenses under Treas. Reg. §1.263(a)-3(d). Replacing a few broken tiles, fixing a leaking faucet, repainting a room, replacing a broken window: these are repairs, not improvements, and never enter the cost-seg flow. The line is whether the work is a betterment, a restoration to original condition (after deterioration), or an adaptation to a new use. The Tangible Property Regulations (T.D. 9636) draw the line precisely; the CPA conversation lands here often.
Citations
- Treas. Reg. §1.263(a)-3 — Improvements vs. repairs (betterments, restorations, adaptations).
- Treas. Reg. §1.168(i)-8(d) — Partial asset disposition election.
- IRC §168(k)(6) — 100% bonus depreciation, OBBBA permanent.
- T.D. 9636 — Tangible Property Regulations finalizing the improvement standards.
- IRS Publication 946 — Recovery periods and conventions for improvements.
Disclaimer. This tutorial describes general federal tax concepts. TaxProtestTx (Nought Labs LLC) is a feasibility-screening tool, not tax advice or a cost segregation study. Calculator output cannot be relied on under Treasury Circular 230. Consult a qualified CPA, EA, or attorney before filing. Results are not guaranteed.