Cost Segregation for Apartment Buildings

An apartment building looks like one asset on a closing statement, but an engineer sees hundreds: unit appliances, carpet and vinyl plank, cabinetry, the pool and its equipment, the parking lot, the site utilities that feed each building. The tax code depreciates the structure over 27.5 years, but many of those components legally belong on 5- or 15-year schedules.

Multifamily is one of the most reliable property types for cost segregation because the component mix is dense and repeatable. Every unit contributes its own appliances, flooring, and millwork, and the site work (paving, landscaping, exterior lighting, dumpster enclosures) scales with unit count. Engineered Tax Services reports typical depreciation acceleration of 20% to 40% of basis for apartment buildings, and larger garden-style communities with heavy site work tend toward the top of that range.

The catch is never the deduction; it is usability. Apartment losses are passive by default under Section 469, so the households that get the most from a study are those with Real Estate Professional Status, passive income from other rentals, or a gain year to absorb the loss. That planning question comes before the engineering.

Multifamily basis splits into three buckets. The structure itself (foundation, framing, roof, core plumbing, central HVAC, elevators) stays at 27.5 years. Unit-level personal property moves to 5 years. Site improvements move to 15 years. The study documents each dollar so the allocation survives the IRS Cost Segregation Audit Techniques Guide standard.

Because 100% bonus depreciation was permanently restored by OBBBA for qualifying property acquired after January 19, 2025, everything a study moves into the 5- and 15-year classes on a newly acquired community is generally deductible in Year 1. Here is what that looks like on a mid-sized deal, using round illustrative numbers.

• Partial dispositions on unit turns. When you renovate units, the study's component detail lets you write off the remaining basis of what you rip out (old flooring, cabinets, appliances) instead of depreciating ghosts. Treasury Regulation 1.168(i)-8 governs the election.
• REPS or passive income pairing. Apartment losses are passive by default; REPS in the household or passive income from other properties converts the study from deferred to current benefit.
• 1031 exchanges on exit. Exchanging defers both the gain and the depreciation recapture a study accelerates, and basis carryover planning decides whether the replacement property deserves its own study.
• Look-back studies on communities you already own. Form 3115 and the Section 481(a) catch-up capture every missed year in a single current deduction, no amended returns.
• Entity and K-1 planning. Most multifamily sits in an LLC taxed as a partnership; special allocations, capital account maintenance, and state PTE elections all interact with a large depreciation year.

A study is only as strong as the cost records behind it. Clean property-level books that separate capital improvements from repairs, track unit-turn spending, and tie to the closing statement give the engineer accurate basis to allocate and give you audit-ready support. If your books lump renovations into one account, fix that first; our landlord accounting service builds exactly this structure, with a capitalization policy that matches the de minimis safe harbor.

On entity structure, most apartment investors hold each property (or small pools) in an LLC taxed as a partnership, which passes depreciation through on K-1s and allows non-pro-rata arrangements with partners. Holding appreciating real estate inside an S corporation is usually a mistake (distributions of appreciated property trigger gain), and a large cost seg deduction does not change that calculus. If you are choosing a structure for a new acquisition, get the entity right before the study, because the deduction lands wherever the property lives.

We coordinate apartment studies through Engineered Tax Services, whose licensed engineers inspect the property, document each component, and produce an IRS-compliant report with audit support. Taxstra then does the tax half: the depreciation schedules, Form 3115 and the 481(a) adjustment for properties already in service, the passive-loss modeling, and the state conformity adjustments where states decouple from bonus depreciation.

That division of labor matters. The engineering firm cannot tell you whether the loss is usable this year, and a tax preparer without the engineering report cannot defend the allocation. You need both halves, coordinated. Disclosure: Taxstra may receive a referral fee if you engage ETS through links on this page.