Introduction:

Apartment buildings, complexes, and multi-family units present a unique opportunity for substantial tax savings through effective cost segregation. Without this study, the traditional 27.5-year depreciation cycle restricts owners to minimal deductions over nearly three decades. However, a strategic analysis of eligible furniture, fixtures, and equipment by a cost segregation provider can potentially elevate depreciation deductions by up to 40% in the first year, resulting in significant short-term tax savings.

Illustrative Example:

Consider ABC Realty, LLC’s experience with a 15-unit apartment complex purchased for $1,000,000 in 2022. In the initial year, they received $18,182 in depreciation deductions, yielding $6,363 in tax savings. After implementing a cost segregation study in 2023, they secured a $325,000 depreciation deduction, translating to $113,750 in tax savings (tax affected at a 35% rate).

Differentiating Factors for Apartment Buildings:

The extent of additional deductions for an apartment building or complex hinges on several factors. Firstly, the number of units plays a crucial role, with more units equating to increased tax savings. Unlike single-family rentals, the potential for exponential growth in deductions becomes evident with a higher unit count. The interior condition of each unit also influences deductions; well-maintained and furnished units enhance the allocation to personal property. Additionally, features such as parking lots and landscaping contribute to increased deductions, making a cost segregation study indispensable for extracting maximum value.

Conclusion:

In essence, the success of a cost segregation study lies in reclassifying items from real property to personal property, creating calculated tax savings. Key determinants of the yield include the number of units, the interior condition of those units, and the presence of onsite parking or landscaping features. Accurate quantification requires a blend of construction, engineering, and tax expertise. With over 20 years of expertise, Alternate Tax Solutions specializes in performing cost segregation studies. Visit our homepage for more information and to schedule a free consultation.