Cost Segregation · Brief · Working level
Cost segregation for senior living facilities
Assisted living can be 27.5-year residential property; skilled nursing is 39-year commercial. That classification question comes before any study — then resident-care equipment, commercial kitchens, and site work drive 20–30% reclassification.
Before a senior living owner segregates anything, a prior question decides the baseline: is the building 27.5-year residential rental property or 39-year nonresidential property? Independent and assisted living usually land at 27.5; skilled nursing usually lands at 39. Only then does the cost segregation study do its work — typically moving 20–30% of basis into 5- and 15-year classes on the strength of care equipment, food service, and campus site work.
The 27.5 vs. 39 question
Residential rental property is a building deriving 80% or more of its gross rental income from dwelling units — units used other than on a transient basis. Independent living apartments qualify comfortably. Assisted living generally qualifies too: residents occupy their units as homes, and the IRS has accepted that meals and personal-care services do not by themselves defeat dwelling-unit status. Skilled nursing sits on the other side of the line — occupancy driven by medical need, semi-private rooms, payment substantially for care rather than lodging — and is conventionally treated as 39-year nonresidential property. Continuing-care campuses mixing all three levels must test building by building, and where a single building mixes uses, the 80% income test decides its whole character. Recovery-period mechanics are in Pub 946; the class framework in asset classes and recovery periods.
What reclassifies
Senior living blends multifamily's unit-level density with hospitality's back-of-house. The Cost Segregation Audit Techniques Guide supplies the structural-component boundary.
Illustrative allocation for a $20M assisted living community (27.5-year baseline), land excluded:
| Component | Class | Share of basis |
|---|---|---|
| Resident room and common-area furniture | 5-year §1245 | 6% |
| Commercial kitchen, dining, laundry equipment | 5-year §1245 | 6% |
| Nurse call, emergency response, security systems | 5-year §1245 | 4% |
| Therapy/wellness equipment, salon equipment | 5-year §1245 | 2% |
| Decorative lighting, millwork, carpet | 5-year §1245 | 4% |
| Parking, landscaping, courtyards, walking paths | 15-year land improvement | 8% |
| Structure, elevators, base building systems | 27.5-year residential | 70% |
Illustrative only; memory-care wings add security and monitoring equipment, skilled facilities add medical gas and treatment infrastructure — some of which is contested territory between equipment and building systems.
Special considerations
Nurse call and emergency response systems are a signature win: they serve the care operation, not the building, and classify as 5-year property much as hospital-style systems did in Hospital Corporation of America v. Commissioner, 109 T.C. 21 (1997). Medical gas piping in skilled facilities follows the same function-based logic. On the other side, wander-management door hardware and fire-safety upgrades integrated into the building's egress system tend to stay structural. Both short-life classes take 100% bonus depreciation for property acquired after January 19, 2025.
The trap: reflexively filing at 39
Buyers of assisted living portfolios often inherit 39-year treatment from a prior owner or default to it because the operation "feels commercial." Over-depreciating the class life in the wrong direction is money left permanently on the table: a 27.5-year building deducts its long-life basis roughly 30% faster than a 39-year building, every year, with no study fee. Test the 80% dwelling-unit income facts at acquisition — and if the facility has been filed at 39 years incorrectly, an accounting-method change on Form 3115 with a Section 481(a) catch-up fixes it prospectively and retroactively at once.
Frequently asked questions
- Is an assisted living facility 27.5-year or 39-year property?
- It depends on whether the facility is residential rental property under Section 168(e)(2)(A) — a building deriving 80% or more of gross rental income from dwelling units, excluding transient use. Assisted living facilities where residents live in their units long-term generally qualify for 27.5 years; skilled nursing facilities, where the arrangement resembles medical care rather than dwelling, are typically 39-year nonresidential property.
- How much of a senior living facility can cost segregation reclassify?
- Commonly 20% to 30% of depreciable basis. Resident room furniture, commercial kitchen and laundry equipment, nurse call and emergency response systems, therapy equipment, and decorative finishes are 5-year personal property; parking, landscaping, courtyards, and walking paths are 15-year land improvements. The remaining structure depreciates over 27.5 or 39 years depending on the residential classification.
- Does the residential classification change the value of a study?
- Yes, modestly. Reclassifying basis out of a 39-year class produces a larger present-value benefit than out of 27.5 years, so a study is worth somewhat more to a skilled nursing facility than to a comparable assisted living facility. But both classes leave the same 5- and 15-year property on the table, all bonus-eligible for acquisitions after January 19, 2025.