Cost Segregation
for Multifamily Properties

How is the cost segregation process different for multifamily properties versus other properties?

Multifamily properties are very popular with investors and syndicators, especially for value-add properties where the rents are targeted for growth to coincide with unit renovations and upgrades to tenant amenities. Typically, a 5 to 7 year hold is planned to provide investors a solid rate of return, then a sale with proceeds distributed upon closing.

Cost segregation can play a critical role in the investor returns for these multifamily investments to reduce current tax liability and increase cash flow. These benefits are two-fold:

Benefit 1: In the reduction of current tax liability and improved cash flow associated with the accelerated depreciation of property components, versus straight-line depreciation.

Benefit 2: When asset level detail is provided on both the accelerated and straight-line property components, the general partner/investor can easily manage disposition and abandonment expenses upon renovations, property improvements, repairs and/or maintenance – to comply with the Tangible Property Regulations. Disposition and abandonment provide a beneficial expense line item that reduces reported income, but not cash flow. These expenses come before the depreciation deductions.

So how is cost segregation different for multifamily properties versus other commercial properties?

Essentially the fundamentals of cost segregation for multifamily properties is no different than any other commercial property types. That said, many investors or CPAs have the impression that cost segregation is a commodity like service, and they are all the basically same. That is just not true. Different firms utilize different core methodologies and mix in a little engineering. ELB utilizes a proprietary “fully engineered and accounted” approach, giving equal treatment to all property components – both straight line and accelerated property. That is why Methodology Matters.

The differences boil down to how the component level depreciation being identified and counted, and the IRS tax code for cost segregation is applied differently to various property types. For example, there are different rules for multifamily, manufacturing, restaurants, mixed-use, etc. Having deep knowledge and analytics of the tax law and rules for each particular property type is essential in accurately identifying and maximizing tax benefits. It is not a “one-tax-rule” fits all properties. Even within different types of manufacturing facilities, the class life of certain property is different. That is why Knowledge and Experience Matters.

Multifamily properties can provide excellent tax benefits, especially garden-style complexes with a lot of land improvements; parking, parking/site lighting, sidewalks, green-space and landscaping, playgrounds, pools, hot tubs, tennis courts, etc. Urban towers also do well, but do not normally have the 15-year land improvement benefits that a garden-style complex provides.

Not all cost segregation studies, or companies are created equal. It is important to do your due diligence and understand your overall objectives. Methodology and experience matter; 1) for accurate and maximum the initial results, 2) for fixed asset detail to easily manage future disposition and abandonment, and 3) to have bullet-proof protection in the event of an audit from a firm that will back their report for life, at no additional fee.