Client Profile
| Industry | Multifamily Real Estate Investor |
| Property | 48-Unit Apartment Complex |
| Purchase Price | $4,800,000 |
| State | Alabama |
| Key Metric | REPS + Grouping Election |
| Year-One Tax Savings | $340,000 |
The Problem
This investor had recently acquired a 48-unit apartment complex for $4.8 million ($3.84 million allocated to the building). The investor's spouse managed the property full-time while the investor operated a separate business generating $900,000 in annual income. The prior accountant had placed the building on a standard 27.5-year MACRS schedule, producing annual depreciation of only $139,600.
More critically, the prior accountant had classified all rental income and losses as passive, the depreciation deductions were trapped. The accountant had not evaluated REPS under IRC §469(c)(7).
AE Tax Advisors Strategy
1. Cost Segregation Study Under IRC §168
We commissioned a detailed cost segregation study. The study reclassified $1,344,000 (35% of building basis) from 27.5-year property to shorter recovery periods: $576,000 to 5-year property, $230,000 to 7-year property, and $538,000 to 15-year property. First-year depreciation increased from $139,600 to approximately $945,000.
2. Real Estate Professional Status Under IRC §469(c)(7)
We documented that the investor's spouse spent over 1,800 hours per year managing the complex and two smaller rentals, exceeding the 750-hour threshold. With REPS status established, all rental losses became non-passive.
3. Grouping Election Under IRC §469
We filed a grouping election to treat all rental properties as a single activity, ensuring the massive accelerated depreciation could offset active business income.
Before & After Comparison
| Category | Before | After | Benefit |
|---|---|---|---|
| Year 1 Depreciation | $139,600 | $945,000 | +$805,400 |
| Loss Classification | Passive (suspended) | Non-Passive (usable) | Losses unlocked |
| Active Income Offset | $0 | $900,000 | $900,000 |
| Year-One Tax Savings | $0 | $340,000 | $340,000 |
Key Takeaways
- Multifamily properties have significant cost segregation potential due to unit-level components that qualify for 5-year recovery periods.
- Real Estate Professional Status through a qualifying spouse allows rental losses to be treated as non-passive on a joint return.
- A grouping election consolidates multiple properties into a single activity for material participation and loss aggregation.
- The combination of cost segregation and REPS status is one of the most powerful legal tax reduction strategies available to real estate investors.