Cost Segregation for Mid-Size Multifamily (20 to 100 Units): What Changes at Scale

Once an apartment property crosses roughly twenty units, the cost segregation analysis changes character. Small multifamily studies are dominated by unit-level finishes and parking. Mid-size complexes introduce shared amenities, central mechanical systems, and multi-building site work, and each of those categories carries its own classification questions.

The headline percentage does not move much. Most 20 to 100 unit properties reclassify 21% to 27% of depreciable basis. What changes is the composition of that percentage and the sophistication required to defend it.

Amenity Space Is Where the Analysis Gets Interesting

A 60-unit complex typically includes a leasing office, a fitness room, a clubhouse or community room, and often a pool. These spaces are disproportionately rich in five-year and seven-year property relative to their square footage.

Fitness rooms contain rubber flooring, mirrors, sound systems, dedicated ventilation, and reinforced electrical, most of which is Sec. 168(e)(3)(B) five-year property rather than building structure. Clubhouses carry millwork, decorative lighting, window treatments, and furniture. Leasing offices add office equipment and furniture that falls into the seven-year class. Pool areas generate substantial fifteen-year land improvement basis through decking, fencing, and the pump and filtration equipment.

Pool equipment deserves specific attention. The pool shell is generally a land improvement with a 15-year recovery period, while pumps, heaters, filtration systems, and chemical feeders are often five-year personal property because they are equipment serving the improvement rather than the improvement itself.

Central Systems and the Structure Question

Mid-size complexes frequently have central boilers, chillers, or shared water heating. General HVAC serving the building is structural and stays on the 27.5-year schedule. Equipment serving a specific function or a specific piece of equipment can be reclassified. A dedicated exhaust fan for a trash room, supplemental cooling for a server or telecom closet, and process piping serving laundry equipment are the recurring examples.

This distinction under Treasury Regulation Sec. 1.48-1(e)(2) and the IRS Cost Segregation Audit Techniques Guide is where inexperienced studies overreach. Aggressive reclassification of general HVAC is one of the most common reasons a study fails on examination.

Worked Example: 64 Units

A partnership acquires a 64-unit garden-style complex for $9,200,000. Land is allocated at $1,400,000, leaving $7,800,000 depreciable. The study identifies five-year property of $897,000 (11.5%), seven-year property of $156,000 (2%), fifteen-year land improvements of $1,014,000 (13%), and structure of $5,733,000 (73.5%).

Reclassified basis totals $2,067,000, fully deductible in year one under IRC Sec. 168(k). The remaining structure adds roughly $208,500 of straight-line depreciation. First-year depreciation is approximately $2,275,500, compared with $283,636 on a straight 27.5-year schedule.

The fifteen-year percentage runs higher than in small multifamily because garden-style complexes spread across multiple buildings, multiplying sidewalk, drive aisle, site lighting, and utility distribution basis.

Partnership Allocation Consequences

Most properties in this range are syndicated or held in multi-member LLCs, which introduces issues a solo owner never faces. A $2.27 million first-year depreciation deduction flows out on Schedule K-1 according to the operating agreement, and the allocation must have substantial economic effect under IRC Sec. 704(b).

Special allocations of depreciation to specific partners are common but require careful drafting. Deficit restoration obligations, qualified income offsets, and minimum gain chargeback provisions all interact with a large early-year loss allocation. Our article on cost segregation and syndication K-1s covers how limited partners should read the resulting statements.

Limited partners should also understand that syndication losses are almost always passive under IRC Sec. 469 regardless of the sponsor's status. A large K-1 loss does not reduce a passive investor's W-2 tax.

Recapture on Exit

Accelerated depreciation is a timing benefit, not a permanent one. On sale, depreciation taken on five-year and seven-year personal property is recaptured as ordinary income under IRC Sec. 1245, not at the 25% unrecaptured Sec. 1250 rate that applies to structural depreciation.

For a property held five years and sold at a gain, that difference can be material. It is not a reason to skip the study, since the time value of a two-million-dollar deduction almost always exceeds the rate differential, but it belongs in the model. A 1031 exchange defers both. See our discussion of depreciation recapture planning before you underwrite the exit.

Frequently Asked Questions

Can pool and clubhouse costs really be accelerated?

Yes, though they split across classes. The pool shell and decking are typically 15-year land improvements, while pumps, heaters, and filtration are often 5-year equipment. Clubhouse millwork, decorative lighting, and furniture fall into 5-year and 7-year classes. The building shell around the clubhouse remains structural.

Why is the land improvement percentage higher on garden-style complexes?

Multiple detached buildings require more drive aisles, sidewalks, site lighting, and underground utility distribution than a single mid-rise with the same unit count. All of that is 15-year property under IRC Sec. 168(e)(3)(C), so spread-out sites carry proportionally more of it.

Does a cost segregation study change my K-1 allocations?

It changes the amount of depreciation flowing through, not the allocation percentages. But a much larger early loss can trigger capital account and deficit restoration provisions in the operating agreement that would not otherwise come into play, so the agreement should be reviewed alongside the study.

Should the sponsor or the investors pay for the study?

It is a partnership expense in nearly every structure we see, paid at the entity level and capitalized into the study year. Sponsors sometimes budget it in the acquisition sources and uses rather than treating it as an operating expense.

Is it too late if the property was acquired two years ago?

No. Form 3115 permits an automatic accounting method change with the full cumulative catch-up claimed in the current year as a Sec. 481(a) adjustment. Two years of missed acceleration often makes the current-year deduction larger than it would have been at acquisition.

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