Cost Segregation And Multifamily Property: Busting The Myths

In J.P. Morgan’s 2023 Commercial Real Estate Outlook, multifamily property is designated as the highest performing of all asset classes. A recent study commissioned by the National Multifamily Housing Council and National Apartment Association revealed that the U.S. needs to build 4.3 million new apartments by 2035. The demand for multifamily units clearly remains strong, reinforcing its reputation as a “safe” investment.

Investors may initially be drawn to this vertical for safety, scalability, and predictable income, but they often stay for the significant tax benefits. Multiple tax strategies are available, including accelerated depreciation, which can be used to offset a portion of that predictable rental income. Cost segregation is the vehicle for these tax savings.

So why doesn’t every multifamily property owner consider cost segregation? Some simply aren’t aware of it, while others have been misinformed. Let’s debunk some of the common myths holding multifamily investors back from potential opportunity.

1. You can only do cost segregation studies on commercial property, not residential rental real estate.

[ False ]
Cost segregation can be performed on residential real estate, from multifamily to single family rental properties, and in fact multifamily properties are considered great candidates for cost segregation.

2. There aren’t a lot of assets to reclassify in a multifamily property.

[ False ]
While the exact yield will vary based on projects details, layout, and location, between 20-35% of assets in multifamily properties may be accelerated.

Without cost segregation, residential real estate capital assets are assigned a 27.5-year Class Life.

With cost segregation, these are just some of the asset categories that can be moved into much shorter Class Lives:
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