Cost Segregation on 200+ Unit Multifamily: Portfolio-Level Strategy

On a two hundred unit asset, nobody debates whether to run a cost segregation study. Depreciable basis is $25 million to $50 million, reclassification is $7 million to $16 million, and the study fee is a fraction of a percent of the benefit. The study is a given.

What matters at this scale is everything around the study: when it is done, how it interacts with the partial disposition election, how it coordinates across a portfolio of acquisitions in different years, and how the deductions actually reach the people who can use them.

Component Profile Is Stable Above 150 Units

The percentages stop moving much once you are past about 150 units. Five-year personal property under IRC Sec. 168(e)(3)(B) settles at 12% to 15% of depreciable basis. Seven-year office and clubhouse furnishings under Sec. 168(e)(3)(C)(ii) run 1.5% to 2.5%. Fifteen-year land improvements under Sec. 168(e)(3)(C) run 14% to 18%. Total reclassification lands at 29% to 35%.

What drives variation at this size is not unit count. It is construction type and parking. Wood-frame garden product with surface parking sits at the top of the range. Concrete podium construction with structured parking sits at the bottom, sometimes as low as 24%, because the garage is building rather than land improvement and the concrete shell absorbs a larger share of cost.

The Partial Disposition Election Is Where the Real Money Is

On a two hundred unit property you will replace roofs, HVAC systems, and unit interiors on a rolling basis. Under Treas. Reg. Sec. 1.168(i)-8, you can elect to treat the retirement of a structural component as a disposition and write off its remaining basis in the year of replacement.

Without a cost segregation study you cannot make this election with any precision, because you do not know the basis of the roof you just tore off. With a study in hand, replacing a $900,000 roof on a property you bought four years ago lets you write off the remaining allocated basis of the old roof, roughly $780,000 in this example, in the year of replacement. You also avoid depreciating two roofs simultaneously for the next 23 years.

This is the compounding argument for doing the study at acquisition rather than waiting. The partial disposition election must generally be made in the year of the disposition, and you need the component basis detail to make it.

Portfolio Sequencing

A sponsor closing four properties across two tax years does not want all four studies producing deductions in the same year if the capital account and passive income picture does not support it. Losses that exceed a partner outside basis under IRC Sec. 704(d) are suspended, and losses that exceed the at-risk amount under Sec. 465 are suspended separately.

Because Form 3115 lets you claim a missed depreciation catch-up in any later year without amending, you have genuine flexibility. A property acquired in 2025 without a study can have its study performed in 2027 and the entire cumulative adjustment claimed in 2027 under Rev. Proc. 2015-13. That is a real planning lever on a portfolio, and it is the reason large sponsors sometimes deliberately defer studies. The mechanics are in our Form 3115 playbook.

The counterpoint is the partial disposition election, which is year-specific and hard to recapture retroactively. If you expect major component replacements in the first three years, do the study at acquisition.

Worked Example: $38 Million Asset

A sponsor acquires a 2015-vintage 220-unit garden community for $38,000,000. Land is allocated $5,000,000, leaving $33,000,000 of depreciable basis.

The study identifies five-year property of $4,620,000 (14%), seven-year property of $660,000 (2%), and fifteen-year land improvements of $5,280,000 (16%). Total reclassified basis is $10,560,000, or 32%. Structure retained is $22,440,000.

Under IRC Sec. 168(k) the full $10,560,000 is deductible in year one. The 27.5-year structure contributes approximately $816,000. First-year depreciation totals roughly $11,376,000 against $1,200,000 unsegregated. The incremental deduction is $10,176,000.

Allocated across a partnership with $12,000,000 of limited partner equity, most LPs will show a first-year loss near or above their entire contribution. Expect basis limitation questions and plan the debt allocation under Treas. Reg. Sec. 1.752-3 accordingly, since partnership-level nonrecourse debt allocations increase outside basis and can preserve deductibility.

Documentation Standards Rise With Size

A $10.5 million reclassification on a single return is a number that gets read. The IRS Cost Segregation Audit Techniques Guide identifies the detailed engineering approach from actual cost records as the most reliable method, and on a recent-vintage property where the seller construction cost detail is obtainable, that is what should be used.

Where actual cost records are unavailable, a detailed engineering cost estimate from a site survey is the next best approach and is fully acceptable when properly executed. What is not acceptable at this size is a rule-of-thumb allocation or a residual estimation approach applied without support. Our checklist for evaluating a study before you file covers the specific documentation to demand from your provider.

Frequently Asked Questions

Should I do studies on all portfolio properties in the same year?

Not necessarily. Losses limited by outside basis under IRC Sec. 704(d) or at-risk under Sec. 465 are suspended, so stacking every study into one year can waste deductions. Form 3115 lets you claim a prior property catch-up in a later year, which makes sequencing a real planning tool.

What is the partial disposition election and why does it need a study?

Under Treas. Reg. Sec. 1.168(i)-8 you can write off the remaining basis of a structural component when you replace it, such as a roof or HVAC system. You need component-level basis detail from a cost segregation study to quantify the write-off, and the election is generally made in the year of replacement.

Why do podium and mid-rise properties reclassify less than garden product?

Structured parking is treated as part of the building rather than as a 15-year land improvement, and concrete construction puts more cost into the structural shell. Podium properties commonly run 24% to 28% versus 30% to 35% for wood-frame garden product with surface parking.

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