A residence and a healthcare operation in one building
An assisted living facility is two asset profiles stacked on one foundation. It houses residents like an apartment building, so it carries the full residential component set: unit flooring, cabinetry, window treatments, site amenities. But it also operates like a healthcare business, which adds nurse call and emergency notification systems, medication rooms, commercial food service, therapy and activity spaces, and backup power sized for life safety.
That second layer is why senior housing reclassifies more than ordinary multifamily. Engineered Tax Services reports typical acceleration of 22% to 45% of basis for assisted living, with memory care and higher-acuity facilities trending toward the top because specialized systems are a larger share of construction cost.
Owners here are often operator-investors or PropCo/OpCo structures rather than passive landlords, which changes both the passive-loss analysis and the entity design. This page covers the study itself, then the strategy stack around it.
Whether a senior facility is 27.5-year residential or 39-year nonresidential property depends on how the building's use tests out under Section 168(e)(2), and the answer shifts the entire baseline schedule. Get that determination made deliberately, in writing, before the study allocates a dollar.
Is the Facility 27.5-Year or 39-Year Property?
The baseline classification that everything else builds on.
Residential rental property under Section 168(e)(2) means a building where 80% or more of gross rental income comes from dwelling units, and a dwelling unit is a house or apartment used to provide living accommodations. Facilities on the independent-living end of the spectrum generally meet the test. Facilities whose charges are predominantly for services and care rather than for occupancy of a dwelling unit, like skilled nursing, are generally treated as nonresidential 39-year property.
Assisted living sits in the middle, and the answer is genuinely fact-specific: it turns on how charges split between lodging and services, whether units qualify as dwelling units, and how the operating agreement is written. The difference matters enormously, because the non-reclassified remainder depreciates over 27.5 years in one case and 39 in the other. We treat this as a documented determination made with your return position in mind, not a default.
Do not let the study assume the answer
Some study providers default every senior facility to 39-year without analyzing the dwelling-unit test. If your facility legitimately qualifies as residential rental property, that default costs you 11.5 years of schedule on the majority of your basis. Make the classification an explicit deliverable.
What Reclassifies in a Care Facility
The component map, from resident rooms to the commercial kitchen.
| Component | MACRS life | Notes |
|---|---|---|
| Nurse call, emergency notification, and wander-management systems | 5-year | Specialized equipment serving the care operation |
| Commercial kitchen equipment and serving lines | 5-year | Food service equipment, not building systems |
| Resident room flooring, cabinetry, window treatments | 5-year | Same analysis as apartment unit interiors |
| Therapy, salon, and activity room equipment and finishes | 5-year | FF&E and removable specialty finishes |
| Dedicated electrical and plumbing serving equipment | 5-year | Allocated portion of systems serving personal property |
| Generators and distribution beyond code-minimum life safety | 5-year | Equipment-serving portion; life-safety core stays with the building |
| Parking, walking paths, courtyards, gardens, fencing | 15-year | Land improvements; secure courtyards are common in memory care |
| Building shell, corridors, core HVAC, sprinklers, elevators | 27.5- or 39-year | Per the classification determination above |
Allocation of dual-function systems (power, plumbing, ventilation) between equipment support and building service is where engineering quality shows; see the IRS Cost Segregation Audit Techniques Guide.
Worked example (illustrative)
64-bed assisted living facility, $9M acquisition
- Purchase price
- $9,000,000
- Land allocation
- ($1,100,000)
- Depreciable basis
- $7,900,000
- Reclassified to 5-year (care systems, kitchen, interiors)
- $1,750,000
- Reclassified to 15-year (site, courtyards, parking)
- $820,000
- Total accelerated (32.5% of basis)
- $2,570,000
- Year 1 deduction with 100% bonus
- ~$2,570,000 plus straight-line on the remainder
Illustrative round numbers at the middle of the ETS 22-45% range. Actual allocation requires the engineering takeoff, and usability depends on the owner's participation and income profile.
The Operator's Strategy Stack
What pairs with the study when you run the facility, not just own it.
Senior housing owners are frequently active operators, and that changes the tax picture in their favor. If you materially participate in an operating business that owns its real estate, the passive-loss wall that stalls apartment investors often does not apply the same way, and a large Year 1 deduction can offset operating income directly. Where the real estate sits in a separate LLC leased to the operating company, the self-rental and grouping rules under the Section 469 regulations decide how the pieces net, and a grouping election is often the difference between a usable loss and a stranded one.
The PropCo/OpCo split itself is usually right for liability and exit reasons: care operations carry real liability, and buyers frequently want the operations without the real estate or vice versa. The cost seg deduction lands in the PropCo, so the lease rate, the grouping election, and each entity's income need to be designed together.
- Monthly accounting that separates care revenue, room and board, and level-of-care charges, which also feeds the residential-classification analysis. Our outsourced bookkeeping builds this chart of accounts.
- Work Opportunity Tax Credit screening for care staff hiring, a payroll-side benefit that stacks with the depreciation strategy.
- Qualified Improvement Property treatment for interior renovations of a 39-year facility, which reaches 15-year life and bonus eligibility on its own.
- Partial dispositions when renovating resident wings, using the study's component detail to write off replaced finishes and systems.
- Form 3115 look-back studies for facilities owned for years without a study.
Hypothetical case study
The operator who unlocked the loss with a grouping election
This is a hypothetical, illustrative composite, not an actual client or an actual result. Savings vary with your income, entity, state, and how usable the losses are.
A hypothetical operator owns a 48-bed facility through an LLC and runs the care company as an S corporation paying rent to the LLC. A $1.9M cost seg reclassification would have created a large passive loss in the LLC while the S corporation showed taxable operating income, the classic self-rental trap.
Modeled properly before filing, a grouping election treating the rental and the operating business as one economic unit allowed the depreciation to net against the care income it economically supports. The Year 1 federal benefit at the owner's bracket was several hundred thousand dollars in this hypothetical; without the election analysis the same study would have produced a suspended loss and a tax bill.
The lesson: in owner-operated senior housing, the entity and election work is not paperwork after the study, it is the study's delivery mechanism.
How We Deliver It
Engineering by ETS, classification and return work by Taxstra.
We coordinate senior-housing studies through Engineered Tax Services, whose engineers have deep experience with care facilities and produce IRS-compliant reports with audit support. Taxstra handles the residential-vs-nonresidential determination, the grouping and election analysis, Form 3115 for in-service properties, and the return itself.
If you want to see what studies have produced on comparable facilities, ETS publishes case studies with the numbers. Disclosure: Taxstra may receive a referral fee if you engage ETS through links on this page.
Estimate Your Savings
A quick estimate from the ETS calculator, then a study only if the numbers justify it.
Estimate Your Cost Segregation Savings
Run your property through the Engineered Tax Services savings calculator for a quick estimate, then have Taxstra pressure-test the number against your full tax picture.
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Calculator provided by Engineered Tax Services. Estimates are educational only and depend on an engineering-based study of your specific property; results are not individualized tax advice.
Disclosure: Taxstra may receive a referral fee if you engage Engineered Tax Services through links on this page. That relationship does not change your price, and it is not a recommendation for your specific situation.
Ready for a Cost Segregation Study?
Two moving parts, handled: Engineered Tax Services performs the engineering-based study, and Taxstra implements it on your tax return, including Form 3115 and the Section 481(a) adjustment for properties you already own.
Disclosure: Taxstra may receive a referral fee if you engage Engineered Tax Services through links on this page. That relationship does not change your price, and it is not a recommendation for your specific situation.
What to check before you order a study
The pre-study review that decides whether the deduction is actually usable.
Get the 27.5 vs 39-year classification determined and documented before the study allocates basis.
If you operate the facility, model the grouping election and self-rental interaction before year-end.
Separate care revenue from occupancy revenue in the books; the split feeds both the classification and the licensing file.
Confirm state bonus-depreciation conformity for every state where owners file.
Inventory planned renovations; partial disposition write-offs need the study's component detail in place first.
Model the study fee against benefit with the cost segregation estimator before engaging.