Real Estate Tax Calc
What qualifies in a multifamily property
Cost segregation studies on apartment buildings typically identify several categories of shorter-life assets. 5-year personal property commonly includes carpeting, certain window coverings, appliances (ranges, dishwashers, refrigerators), and decorative millwork. 7-year property may include certain fixtures and office equipment in leasing areas. 15-year land improvements include paved parking areas, sidewalks, landscaping, fencing, outdoor lighting, and swimming pools.
Together, these typically represent 15–25% of a multifamily building's depreciable basis — lower than commercial properties, but still substantial on a large complex. A $3 million depreciable basis with 20% reclassification means $600,000 in shorter-life assets, generating significant first-year acceleration when combined with bonus depreciation.
The appliance question
Appliances in apartment units often get separate attention. If appliances are included in the purchase price, they can be reclassified as 5-year personal property and benefit from accelerated depreciation and bonus. If you buy them separately, they're already 5-year property. Either way, tracking appliances separately from the building ensures you depreciate them on the correct schedule and can claim bonus depreciation on replacements.
Sizing the study for smaller properties
For smaller multifamily properties (duplexes, triplexes, small apartment buildings), a full engineered cost segregation study may not pencil out — the study cost can approach or exceed the tax savings for properties under $500,000 in depreciable basis. Alternative: use the IRS-provided Appendix B of Publication 946, which gives class lives for common building components, or consider a less expensive 'residential cost segregation' report rather than a full engineered study.
A worked example on a $3 million complex
Suppose you acquire a garden-style apartment complex with a $3,000,000 depreciable basis after carving out the land value. Without cost segregation, you depreciate the whole amount straight-line over 27.5 years — roughly $109,000 per year. A study then identifies 20% of the basis, or $600,000, as 5-, 7-, and 15-year property.
With 100% bonus depreciation available for qualified property placed in service after January 19, 2025, that entire $600,000 can be deducted in year one, on top of the normal first-year depreciation on the remaining $2.4M of 27.5-year structure. Instead of about $109,000 of first-year depreciation you might claim well over $650,000. At a combined 35% federal-plus-state marginal rate, that is more than $200,000 of tax deferred into year one — capital you can redeploy into the next acquisition or a value-add renovation.
How bonus depreciation changes the math
Cost segregation and bonus depreciation work as a pair. Bonus depreciation lets you immediately expense qualified property with a MACRS recovery period of 20 years or less — precisely the 5-, 7-, and 15-year buckets a study creates. The 27.5-year building shell itself never qualifies, which is why the study's job is to peel components out of the shell.
Bonus was scheduled to phase down (60% in 2024, 40% in 2025, and so on), but 2025 legislation restored 100% bonus depreciation for qualified property placed in service after January 19, 2025. If your acquisition or renovation was placed in service in that window, the reclassified components are fully deductible in the first year. For property placed in service earlier, the lower phase-down percentage applies to the bonus portion, with the remainder recovered on the normal accelerated schedule.
Watch the passive activity loss rules
A large first-year deduction frequently pushes a rental into a paper loss. For most investors, rental real estate is a passive activity, and passive losses can only offset passive income — not W-2 wages or portfolio income. A cost seg deduction that creates a $150,000 loss does you no immediate good if you have no passive income to absorb it; the excess is suspended and carried forward.
There are important exceptions. If you or your spouse qualify as a real estate professional and materially participate, the losses become non-passive and can offset ordinary income. Active participants with modified AGI under $100,000 can use up to a $25,000 special allowance (phasing out entirely by $150,000 MAGI). And a short-term rental where the average guest stay is seven days or less is not automatically passive — with material participation, those losses can offset other income even without real estate professional status. Model your ability to use the deduction before you pay for a study.
What happens to the accelerated depreciation at sale
Cost segregation is a timing strategy, not a permanent exclusion, and it changes the character of the gain when you sell. The 5- and 7-year personal property is subject to Section 1245 recapture: depreciation taken on those items is recaptured as ordinary income (up to your top ordinary rate) to the extent of the accumulated depreciation. The 15-year land improvements and the building fall under Section 1250; the building's straight-line depreciation is unrecaptured Section 1250 gain taxed at up to 25%.
The practical effect is that a study shifts some of your eventual recapture from the 25% Section 1250 rate into ordinary-income Section 1245 recapture. Whether that is a good trade depends on the years of tax deferral you gained, your rate then versus now, and whether you plan a 1031 exchange — which can defer the recapture entirely if structured correctly.
When a study is worth it for multifamily
The economics turn on depreciable basis and how long you will hold. As a rough guide, a full engineered study makes sense once depreciable basis exceeds roughly $500,000 and you expect to hold the property at least a few years. Below that, the $5,000–$15,000 study fee eats too much of the benefit, and a low-cost residential cost seg report or the IRS class-life tables may be the better route.
Holding period matters because the benefit is time value: you accelerate deductions you would otherwise take slowly, and if you sell within a year or two the recapture largely claws them back. Investors who buy, hold, and eventually 1031 into larger properties capture the most value, because each exchange rolls the deferral forward instead of triggering recapture.
Planning tips
Time the study to the year the property is placed in service — usually the acquisition year — so the deductions land when you can use them and match a high-income year if possible. If you already own the building and never did a study, you are not out of luck: a look-back study lets you claim all the depreciation you should have taken in prior years, caught up in the current year via a Form 3115 change in accounting method, with no amended returns required.
A study also pairs naturally with a value-add renovation. Renovation costs are fresh basis, and interior improvements to a residential rental may include components that qualify for accelerated treatment. Coordinate the engineer, your CPA, and your renovation timeline so the first-year deduction lines up with the year you most need the offset.
Multifamily components worth flagging
Beyond the obvious carpet-and-appliance items, apartment complexes hold reclassifiable value that inexperienced reviewers miss. On-site amenities — pool and spa equipment, fitness-room finishes, clubhouse cabinetry, playground and dog-park structures — frequently split between 5-year personal property and 15-year land improvements. So do site systems: exterior lighting, security gates and cameras, irrigation, and site drainage.
Furnished or short-term-rental units add another layer, because the furniture, window treatments, and small appliances are clearly 5-year personal property. When you tour the property with the engineer, point out every landlord-owned item; the difference between a thorough walk-through and a desktop estimate can be several percentage points of the total basis.
Documentation and audit defense
A defensible study is an engineered one: the provider inspects the property, reviews construction documents or appraisals, measures and photographs components, and assigns each to a MACRS class with a written rationale tied to the tax code and case law. The IRS Cost Segregation Audit Techniques Guide describes exactly what examiners look for, and a report that follows it stands up far better than a rule-of-thumb allocation.
Keep the full report, the engineer's workpapers, and the placed-in-service documentation with your permanent tax records. If you ever face examination — or claim a large first-year bonus deduction that draws scrutiny — the study is your evidence. Cheap 'DIY' allocations that lack an engineering basis are the ones that get adjusted, so weigh the modest study fee against the risk of losing the deduction entirely.
Frequently asked questions
What percentage of an apartment building gets reclassified?
Typically 15–25% for standard residential multifamily. Properties with more personal property (furnished units, on-site amenities) or significant land improvements may be toward the high end.
Does the apartment building itself qualify for bonus depreciation?
No. The 27.5-year residential structure exceeds the 20-year MACRS limit. Only the 5-, 7-, and 15-year components a study carves out qualify for bonus depreciation.
Will cost segregation create a loss I can actually deduct?
Only if you have passive income, qualify as a real estate professional, use the $25,000 special allowance, or run short-term rentals with material participation. Otherwise the loss is suspended and carried forward.
Do I owe more tax when I sell because of cost segregation?
You may. It shifts some gain into Section 1245 ordinary recapture rather than the 25% Section 1250 rate. The net benefit depends on your years of deferral, your rates, and whether you do a 1031 exchange.
Can I do a study on an apartment building I've owned for years?
Yes. A look-back study lets you claim all previously missed accelerated depreciation, caught up in the current year through a Form 3115 change in accounting method — no amended returns required.
Are appliances in apartments depreciable separately?
Yes. Appliances are 5-year personal property and can receive bonus depreciation. They depreciate faster than the building structure.
Is cost segregation worth it for a small apartment building?
For properties with less than $500,000 in depreciable basis, a full engineered study often does not pay. Explore less expensive alternatives or wait until you own a larger property.
Sources
Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.