The Tax-Savvy Real Estate Investor
Tax Tips & Wealth Building Insights
OCTOBER 2025
In This Issue
- Partial Asset Dispositions (PAD) – How to turn property upgrades like roof or HVAC replacements into immediate tax deductions instead of waiting decades to depreciate them.
- Identifying Qualifying Components – What really counts for a partial disposition, how to document it properly, and the IRS rules to keep in mind.
- Case Study – A $300K renovation that unlocked over $70K in tax savings through strategic planning and meticulous documentation.
- How to Book Partial Asset Dispositions – Step-by-step guidance for tracking, recording, and reporting PAD in your accounting system.
- Real Estate Market Snapshot – The latest on the shifting 2025 housing market, mortgage rates, rent trends, and where smart investors are finding opportunity right now.
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OBJECTIVE
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PROBLEM
Staying current with ever-evolving tax codes, accounting standards, and market shifts is challenging and time-consuming, especially for busy real estate investors and entrepreneurs. Mistimed acquisitions, missed deductions, and lack of awareness about impending legislative changes can erode profits and stall growth. Our playbook solves this problem by providing timely, curated, and expert-driven guidance—all in one place—so you can confidently take proactive action rather than react late to tax and regulatory changes.
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CONTACT US
At Aiola CPA, we measure our success by your results. By combining technical expertise, industry specialization, personal investment experience, and a client-centered approach, we aim to help you reduce tax liabilities, streamline operations, and ultimately build long-term wealth through real estate.
CPA Insights
Welcome to the October edition of The Tax-Savvy Real Estate Investor. This month, we’re digging into a strategy that doesn’t get nearly enough attention among real estate investors – partial asset dispositions (PAD). It’s a fancy term, but the idea is simple: when you replace a part of a property (like a roof, HVAC system, or windows), you can actually write off the remaining value of the old asset that you replaced instead of continuing to depreciate it for the next 27.5 or 39 years.
What exactly is a PAD?
Under IRS Reg. §1.168(i)-8, you’re allowed to “dispose” of part of a depreciable asset when you replace it. Instead of waiting decades to finish depreciating the remaining value of an asset you replace, you can claim a deduction for whatever value it has left in the year it is replaced.
Example: if your old roof cost $30,000 and still had $20,000 left to depreciate when you replaced it, that $20,000 can be fully written off in the year it is disposed (replaced) and reduce your taxable income.
PAD works especially well on properties that had a cost segregation study performed. A cost seg study breaks your property down into separate components with shorter depreciation lives, allowing you to leverage PAD on both small and large improvements.
How to make PAD work
To get the most out of a partial asset disposition, start by identifying what actually qualifies. PAD applies to physical components of your property that were capitalized as improvements (roofs, flooring, windows, electrical wiring, etc.). You’ll need to show what was replaced and how much basis it had left, which simply means the original cost minus the depreciation you’ve already taken.
Good documentation goes a long way here. Keep your invoices, contracts, and photos from before and after the renovation. If you’ve had a cost segregation study done, use it to back up your numbers. Without that paper trail, the IRS might not agree with your position, and that’s never a fun conversation.
When tax time comes around, there’s no special election or form to fill out. You report the disposition on your return for that year. It’s important to think about timing. Claiming PAD losses in higher-income years usually gives you the biggest bang for your buck. In lower-income years, you might save less, so it’s worth planning ahead.
Putting It All Together
Partial asset dispositions might sound technical, but they’re really just a smart way to maximize the tax benefit of your renovations. When you replace a capital expenditure, you don’t have to keep depreciating the old one forever. You can write off what’s left of it right away and move on. That means more deductions now, better cash flow, and extra money to put toward your next deal.
The key is planning ahead and keeping good records. Pair PAD with a cost segregation study, line up your timing with higher-income years, and you can squeeze a lot more value out of the improvements you’re already making.
At Aiola CPA, we love helping real estate investors with practical strategies that make a real difference. If you want to see how PAD could fit into your tax plan, reach out. We’ll break it down and show you how to make it work for your properties.
Evergreen Tax Strategies for Real Estate Investors
Real estate isn’t just one of the best ways to build long-term wealth, it’s also one of the most tax-friendly ways to generate steady cash flow. This month, we’re digging into figuring out which parts of your property actually qualify for a partial disposition. That means knowing which components can be written off when replaced.
What Qualifies as a Qualifying Component?
What It Is
A “qualifying component” is basically any depreciable part of your property that gets replaced or removed. The IRS allows you to treat that asset as a separate asset from the rest of the building or improvements when it’s disposed of.
The important part is that the component is capitalized as an asset with its own cost basis. Ideally, that basis was broken out when you bought or improved the property (a cost segregation study helps with this). For example, replacing your entire roof counts, but patching a few shingles does not.
Why It Matters
Partial dispositions can save you thousands in taxes. Instead of just adding the cost of the new roof to your depreciation schedule and waiting 27.5 or 39 years to recover it, you can write off the remaining value of the old roof in the year of replacement. That’s an immediate deduction that reduces your taxable income right now.
Reporting PADs incorrectly can lead to unwanted attention from the IRS, so this is one of those areas where slowing down and doing it right pays off (literally).
Implementation
Start by taking a look at your property’s depreciation schedule. When you’re planning a big renovation, identify the specific assets that you might be replacing. For example, note whether the project is a full replacement of the whole HVAC system, or just a small part.
Next, determine the undepreciated basis of the old component (basically, what’s left of its value on paper).
When it’s time to file, you’ll report the loss on Form 4797 for that tax year. There’s no separate election required.
And yes, documentation still matters. Keep your invoices, before and after photos (we’ve been asked for these when representing clients in audits), and any cost segregation or improvement studies. The IRS audit window is typically three years, so hold onto those records just to be safe.
Putting It All Together
The main idea is simple: when you replace a major building component, don’t let the old one sit there on your books collecting dust. Write it off, and reduce your taxable income. PAD can turn standard improvements into big tax savings and extra cash for your next investment.
If you’d like to see how this could work for your own rentals, reach out and we’ll walk you through it.
Case Study
Note: For client confidentiality, the names and certain details in this case study have been altered.
The Background
“Alex,” is a real estate investor in Florida with a portfolio of 15 rental properties, generating steady passive income. Alex regularly renovates his properties to maintain values and increase rents, focusing this year on a significant renovation of a $1.2M multifamily building acquired several years ago.
The Situation
Alex planned a $300,000 renovation, including replacing the roof, HVAC system, windows, and plumbing. Recognizing the tax opportunities for partial dispositions, the goal was to document the dispositions accurately, accelerate deductions on the old components’ remaining basis, and generate tax savings to reinvest into his next deal.
The Challenges
- Planning: Figuring out which components qualified for disposition and calculating the adjusted basis to be written off.
- Documentation: Keeping clean records during the renovation (photos, invoices, receipts) to back up the deductions.
- Reporting: Making sure the updated depreciation schedules and tax filings reported everything correctly.
- ROI: Confirming that the projected tax savings made the renovation pay off from both a cash flow and tax standpoint.
- Future improvements: Building a repeatable process so Alex could use the same approach for future renovations.
The Approach
- Before renovation: We pulled up the cost segregation study from the original purchase and depreciation schedule to identify the basis of assets to be replaced. We also coordinated with the contractor to make sure invoices were itemized and detailed.
- During renovation: Every disposal was documented, which made it easy to show that the old assets were permanently disposed.
- After renovation: We updated the depreciation schedule to remove $180,000 of undepreciated basis from the replaced components and applied bonus depreciation to $50,000 worth of assets with shorter depreciation lives.
- Projected savings: The $180,000 of deductions from partial asset dispositions plus $50,000 of bonus depreciation totaled $230,000 in deductions this year.
The Results
The $300,000 renovation ended up generating $230,000 in deductions, saving almost $75,000 in federal taxes at Alex’s 32% bracket. The savings created additional cash flow, which Alex plans to use towards a down payment for the next rental property.
The Takeaways
Alex’s renovation shows the power of strategic partial disposition planning:
- Timing and structure matter. Pre-renovation cost segregation and organized documentation made everything flow smoothly.
- Deductions = cash flow. Turning renovation costs into immediate write-offs helped fund the next investment.
- Process pays off. The same system can now be repeated across the portfolio, compounding tax benefits over time.
Even experienced investors overlook this strategy, but once you see the results, it’s hard to ignore. Have a renovation planned? Let’s strategize and make the most out of it.
Accounting Guidelines
Real estate moves fast (renovations, acquisitions, new projects), and your books need to keep up. Whether you’re replacing flooring, upgrading your electrical system, or tearing out old plumbing, properly tracking partial dispositions makes sure you’re not leaving money on the table and that your books match your tax return.
Do You Need to Adjust Your Basis After a Partial Disposition?
Short answer: yes.
A partial asset disposition (PAD) happens when you replace part of a larger asset instead of the whole thing, like replacing your roof, retiling your bathroom, or replacing your doors, while keeping the building itself. Instead of continuing to depreciate the old component for the next couple decades, you can immediately recognize a loss for the portion you removed.
Her’s how to handle it:
- Identify the assets that are being replaced. Look at the fixed assets section of your Balance Sheet to find the basis of the assets that will be disposed in the renovation.
- Calculate and record the loss. Figure out the adjusted basis of what you’re removing (original cost minus depreciation). Book the disposition to your P&L as a deductible loss. Reduce the assets and related accumulated depreciation as your offset to booking the deductible loss.
- Update your depreciation schedule. After the disposition, reduce the assets and related accumulated depreciation of the disposed asset on your Balance Sheet.
Correctly reporting PAD ensures your financials actually reflect what’s happening in real life. Skipping a step can inflate the basis of a depreciable asset, overstate depreciation, or miss out on a large tax deduction.
Putting It All Together
Partial asset dispositions might not be the flashiest part of real estate investing, but they can quietly save you thousands. When you track improvements, stay consistent with your bookkeeping, and keep solid records, you set yourself up for success.
Clean books mean more confidence in an audit, smoother tax prep, and financials that actually reflect what’s happening with your properties. It’s simple: stay organized, document well, and let your tax strategy work as hard as your investments do.
If you want to make sure you’re getting every deduction you’re entitled to, reach out and we’ll help you set it up right.
Market Outlook
A Weakening Market with Prime Buying Opportunities
As we close out October, the housing market is continuing to shift in favor of buyers. Prices have flattened out and after adjusting for inflation, they’re actually drifting lower. Inventory is finally starting to build, though it’s still below long-term averages, and rent growth has cooled as higher costs put pressure on tenants and investors alike.
This isn’t a crash, it’s more of a healthy correction. For patient investors, it’s shaping up to be one of the best buying environments we’ve seen in years. The key is to focus on strong cash flow and long-term holds instead of chasing short-term appreciation. Forced selling still looks unlikely, so opportunities will favor those ready to act decisively when good deals hit the market.
Mortgage Rates Holding Steady
- Current Levels: 30-year fixed rates remain in the 6.25%–6.75% range, with no major shifts from recent months.
- Drivers: Inflation is hovering near 3%, and the labor market is showing mild softening – enough to make the Fed consider future cuts, but not enough to move rates lower just yet. Ongoing global and tech-sector slowdowns are also keeping investors cautious.
- Forecast: Expect rates to hover in the mid-6s into 2026, with meaningful drops only if a deeper recession hits.
- Takeaway: If you find a deal that works at current rates, take it. Waiting for a rate crash could mean missing opportunities that already work. Focus on properties that cash flow under current conditions – appreciation will follow in time.
Inventory is Growing, But Still Constrained
- Active Inventory: Up roughly 17% year-over-year, sitting around 1.5–1.6 million homes nationwide – the most since 2019, but still about 15–20% below pre-pandemic levels.
- New Listings: Supply is building faster than demand, giving buyers more leverage and driving more price reductions. Sellers who overprice are feeling it quickly.
- Regional Dynamics: Inventory surges are most visible in Florida, Texas, and parts of the West (Austin up 25–30%, Denver around 20–25%). Meanwhile, Northeast metros like Providence and Hartford remain tight, with listings still 50–60% below normal. Even steady markets like Milwaukee and Detroit have cooled – annual growth slipping from ~7% to ~3%.
- Supply/Demand Balance: More sellers are testing the market amid affordability pressures, while buyers remain cautious, resulting in sluggish sales volume (~4 million annualized vs. the 5–5.5 million norm).
- Takeaway: Look for opportunity in markets where listings are piling up and sellers are motivated. Inventory-heavy metros often yield the best discounts. Expect continued softness into early 2026 before things stabilize.
Home Prices Stalling Nominally, Declining in Real Terms
- Regional Variations: The Midwest and Northeast are holding up best (Milwaukee +3%, Cleveland +3–4%), while California, Oregon, Arizona, and parts of Florida and Texas are seeing price slippage. Overall, sale-to-list ratios have dipped below 99%, signaling broader softening.
- Demand Context: Affordability remains the issue. With mortgage rates and inflation squeezing buyers, prices are likely to dip 1–3% nominally over the next 6–12 months, translating to –4% to –6% in real terms after inflation.
- Takeaway: Bid below asking in cooling markets, and look to the Midwest and Northeast for relative stability. Treat this as a long-term buying window – true rebounds tend to take 5–7 years, as seen in past market cycles.
Rent Growth Slowing, Multifamily Leads the Weakness
- Segment Breakdown: The multifamily space is taking the biggest hit right now. A flood of new units from projects started back in 2021–2022 is finally hitting the market, and that extra supply is forcing landlords to offer concessions and lower rents to fill vacancies. Single-family rentals aren’t immune either – renters have more options, and many are shopping around for better deals.
- Drivers: The job market’s cooling off, consumers are feeling stretched, and fewer people are moving out on their own. It’s not a recession, but it feels like one for a lot of households. When people tighten their budgets, rent growth slows.
- Forecast: Expect rents to stay mostly flat through 2025, maybe ticking up again in 2026 once the extra multifamily supply is absorbed. That rebound, though, depends heavily on how the labor market holds up.
- Takeaway: Keep your rent projections realistic. Look for properties that make sense at today’s number. Rents usually stabilize faster than home prices in a correction, which can quietly boost your returns once the market settles.
Bottom Line
October 2025 is shaping up as a clear buyer’s market. Prices are basically flat (up 1–2% year-over-year, but down slightly from their seasonal peaks), and after adjusting for inflation, they’re about 3% lower than 2022 levels. Inventory is climbing (up roughly 17% from last year) but still hasn’t caught up to pre-pandemic norms, and rents are holding steady, hovering somewhere between –1% and +4%.
How to play it:
- Look for discounts in markets with growing inventory.
- Prioritize cash-flowing buy-and-holds for 5–10 years, avoid flips or appreciation bets.
- Prioritize quality over quantity. Great locations and solid returns beat chasing scale every time.
If you need help refining strategies, tax angles, or deal analysis, reach out – we are here to help!
Q&A: Top Questions from Our Clients
Below are three questions we’ve received from clients this month.
Q: What documentation does the IRS require for partial asset dispositions (PAD)?
A: For PAD, the IRS requires you to report the disposition on your tax return in the year it occurs, using Form 4797 to report the loss on the partial disposition.
Supporting documentation includes records that substantiate the original cost basis of the asset (e.g., invoices, purchase contracts, or a cost segregation study), proof of the disposition (e.g., contractor invoices, photos, or disposal records). These records are crucial for audits, to ensure the adjusted basis and fair market value are accurately reported.
Q: Can PAD apply to short-term rentals?
A: Yes, PAD can apply to short-term rentals, allowing investors to deduct the remaining undepreciated basis of disposed components when replaced or removed during renovations.
Q: What’s the biggest mistake investors make with PAD?
A: Honestly, most investors don’t even realize they qualify for it. They replace an asset, capitalize it, and keep depreciating the old one like nothing happened. That’s money left on the table. The other big miss is poor documentation (not keeping photos, invoices, or cost breakdowns). Without proof, the IRS won’t let you take the loss. The key is to plan ahead and treat every major upgrade like an opportunity to write off what’s being replaced.
Have a Question?
Email us at [email protected] to send us your questions to be featured in next month’s issue!
Contact Information & Next Steps
Turning Knowledge into Action:
We hope this inaugural edition of The Tax-Savvy Real Estate Investor has armed you with valuable information and sparked ideas for enhancing your tax efficiency, refining your accounting practices, and exploring new market opportunities. However, information alone is not enough—real transformation requires taking the next step.
How Aiola CPA Can Help:
As a specialized CPA firm focused on real estate, our mission is to deliver proactive advisory services that turn complexity into clarity. Whether you’re a seasoned investor with a diverse portfolio or a newcomer aiming to build a stable foundation, we’re here to help you tailor strategies that align with your unique goals.
Services Offered:
- Comprehensive Tax Planning: From optimizing depreciation deductions to structuring acquisitions and refining entity setups, we identify tax-saving strategies tailored to your situation.
- Accounting Guidance: We can help you select and implement the right software tools, establish proper accounting protocols, and maintain accurate records that support solid financial decisions and smooth tax filings.
- STR and REPS Consulting: We assist in documenting hours, structuring workflows, and meeting IRS criteria for the STR loophole and Real Estate Professional Status—unlocking substantial tax benefits.
- Transaction Support: Contemplating a 1031 exchange, a large-scale renovation, or a multi-property acquisition? We provide scenario analysis, cost/benefit evaluations, and guidance on optimal timing so you can execute moves with confidence.
The Consultation Process:
- Initial Inquiry: Complete our intake form and receive an email from us with a packet of information on our services and pricing, and a link to schedule an intro meeting.
- Discovery Meeting: We’ll schedule a complimentary 30-minute video meeting to assess your situation, provide more info on our services and how we can help, and outline potential next steps.
- Proposal & Engagement: After understanding your goals and reviewing initial information, we’ll propose a tailored service plan detailing the scope of work, deliverables, and fees.
- Ongoing Advisory & Implementation: Once engaged, we become your partner in navigating the financial and regulatory landscape. Through initial strategic discussions, regular check-ups, timely alerts on legislative changes, and real-time advice, we help you stay up-to-date and proactive rather than reactive.
Staying Informed & Connected:
- Playbook Subscription: If you received this playbook from a friend or colleague, be sure to subscribe directly on our website to ensure you never miss an update. We’ll continue to provide market insights, regulatory alerts, and strategic recommendations in future editions.
- Social Media & Blog Posts: We are committed to additional content rollouts this year, as well. Follow us on our various social media channels and visit our website’s blog for timely articles, quick tips, and breaking news that can affect your portfolio.
- Webinars & Workshops: Stay tuned for invitations to our upcoming educational webinars and workshops, where we discuss advanced topics like complex deal structuring, Opportunity Zone updates, or leveraging retirement accounts for real estate investing.
Our Commitment to Your Success:
At Aiola CPA, we measure our success by your results. By combining technical expertise, industry specialization, personal investment experience, and a client-centered approach, we aim to help you reduce tax liabilities, streamline operations, and ultimately build long-term wealth through real estate.
Ready to Take the Next Step?
Contact us today to schedule a discovery call and learn how we can help you make the most of your investments, navigate a changing tax landscape, and achieve your financial goals.
