Two recovery periods, one building
A building that combines residential apartments with ground-floor retail or office space has two depreciation schedules: the residential portion depreciates over 27.5 years and the commercial portion over 39 years. When you commission a cost segregation study on a mixed-use property, the engineer must allocate identified personal property and land-improvement components between the two uses.
The simplest and most defensible allocation method is square footage. If 70% of rentable area is residential and 30% is commercial, general building-wide components (parking lot, shared lobby improvements) are allocated 70/30. Components that exclusively serve one use (restaurant kitchen equipment = commercial; apartment fixtures = residential) are fully allocated to that use.
Impact on depreciation and bonus
Components allocated to the residential portion are residential 5-year or 15-year property; those allocated to the commercial portion are commercial 5-year or 15-year property. Fortunately, both categories qualify for bonus depreciation (for property placed in service before the phase-out ends), so the timing impact is the same. The separation matters most for recapture at sale, where you must be able to show which components belong to which use to correctly compute the gain on each portion.
Buildings that are predominantly residential (80% or more residential by gross rent) are treated as entirely residential for MACRS purposes under the de minimis rule in some analyses, but a true mixed-use building must be allocated.
Practical tips
Commission the cost segregation study before or at the time of the first tax return for the property — retroactive studies via Form 3115 are available but more complex. Ask the engineer to provide a schedule that separates residential and commercial components, especially for shared systems like parking and structural improvements. Keep the engineer's report and the allocation workpapers with your tax records permanently, since mixed-use allocations often become important at sale.
Frequently asked questions
How do I split depreciation between the residential and commercial parts of a mixed-use building?
Use square footage as the default allocation. Components that exclusively serve one use are fully allocated to that use; shared components are split by the residential/commercial sq ft ratio.
Does a mixed-use building always need two separate depreciation schedules?
Yes. The residential portion uses a 27.5-year recovery period, and the commercial portion uses 39 years. These must be tracked separately on your depreciation schedule.
Do land improvements in a mixed-use building get a single 15-year life?
Yes — the 15-year MACRS classification applies regardless of whether the improvement serves the residential or commercial portion, though it must still be allocated between the two for recapture purposes.
Sources
Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.