Cost Segregation · Brief · Working level
Cost segregation for multifamily properties
Apartment buildings depreciate over 27.5 years, but a cost segregation study typically moves 20–30% of basis into 5- and 15-year classes — unit appliances and finishes, site amenities, parking. What reclassifies, and when the economics work.
An apartment building is 27.5-year property under MACRS — the longest-suffering recovery period short of commercial's 39 — but a meaningful slice of what an investor pays for is not "building" at all. A cost segregation study on a typical multifamily asset reclassifies 20–30% of depreciable basis into 5-year personal property and 15-year land improvements, and both classes ride 100% bonus depreciation for property acquired after January 19, 2025.
What reclassifies in an apartment building
Multifamily is fertile ground for a study because the product is dense with short-life components repeated across every unit. The Cost Segregation Audit Techniques Guide is the IRS's own map of the component analysis; the recovery periods come from MACRS as detailed in Pub 946.
Typical component classes in a garden-style multifamily study:
| Component | Class | Recovery period |
|---|---|---|
| Unit appliances (ranges, refrigerators, W/D) | §1245 personal property | 5-year |
| Carpet, vinyl plank, window treatments | §1245 personal property | 5-year |
| Unit cabinetry and decorative millwork | §1245 personal property | 5-year |
| Clubhouse furniture, fitness equipment | §1245 personal property | 5-year |
| Parking lots, curbs, sidewalks | Land improvement | 15-year |
| Landscaping, irrigation, fencing | Land improvement | 15-year |
| Pool, playground, dog park | Land improvement | 15-year |
| Structure, roof, HVAC, base electrical/plumbing | Residential rental | 27.5-year |
The dividing lines are functional, not cosmetic. Electrical serving a specific appliance can follow the appliance into 5-year; the panel and general distribution stay at 27.5. Carpet qualifies as tacked-down personal property; the slab under it does not.
A representative allocation
Illustrative allocation of depreciable basis after a study on a $10M garden-style acquisition (land already excluded):
Illustrative; garden-style properties with extensive site work reach the high end, mid-rise and high-rise properties the low end.
On those numbers, $2.5M of a $10M basis becomes bonus-eligible. At 100% bonus and a 37% marginal rate, first-year federal deferral approaches $900,000 — against a study fee typically in the $5,000–$15,000 range for an asset this size. Garden-style communities, with sprawling parking and amenities, allocate more to 15-year than a high-rise on a podium, where site work is minimal. How multifamily compares to other asset types is covered in cost segregation by property type.
When the multifamily study does not pay
- Passive owners. A W-2 earner holding an LP interest usually cannot deduct the losses currently; they suspend under Section 469 until income or disposition.
- Short expected holds without exit planning. The 5-year bucket is Section 1245 property, and its recapture at sale is ordinary income — a quick flip can hand back much of the benefit at a worse rate.
- Small basis. Below roughly $500,000 of depreciable basis the fixed study fee consumes the benefit.
- Low bracket or existing losses. Deferral is worth the owner's marginal rate; an owner already in losses is buying deductions they cannot use.
Frequently asked questions
- How much of an apartment building can cost segregation reclassify?
- Typically 20% to 30% of depreciable basis. Residential rental property defaults to 27.5-year straight-line under MACRS, but a study reclassifies unit appliances, carpet, cabinetry, and specialty electrical as 5-year personal property, and site work — parking lots, landscaping, pools, fencing — as 15-year land improvements. Both classes are also eligible for 100% bonus depreciation for property acquired after January 19, 2025.
- Is cost segregation worth it for a small multifamily property?
- Usually only above roughly $500,000 of depreciable basis. Study fees are relatively fixed, so a duplex rarely supports the cost, while a garden-style complex almost always does. The owner's tax posture matters as much as size: reclassified losses that are trapped by passive activity limits produce no current cash benefit regardless of the study's technical quality.
- Do apartment appliances qualify for bonus depreciation?
- Yes. Unit appliances — ranges, refrigerators, dishwashers, in-unit washers and dryers — are 5-year Section 1245 personal property, and 5-year property qualifies for bonus depreciation. Under the OBBBA, 100% bonus applies to qualified property acquired after January 19, 2025; earlier acquisitions follow the phase-down (80% for 2023, 60% for 2024).