Accelerate your property depreciation deductions with this often-overlooked tax strategy.

Cost segregation can save owners of apartments and other commercial buildings a lot of money on taxes. It lets them take bigger tax deductions earlier on by splitting out parts of the building. This can increase cash flow, returns on investment after taxes, and make their properties seem more valuable.

But myths about cost segregation on apartment buildings still float around, stopping investors from using this strategic tax method. In this article, we clear up some common misunderstandings and show the truth.

What is Cost Segregation?

Cost segregation is an IRS-approved method of reclassifying components and improvements of a building into shorter depreciable lives. The goal is to maximize accelerated depreciation deductions in the early years of a property's life.

Normally, real estate improvements must be depreciated over 27.5 or 39 years per the IRS "Modified Accelerated Cost Recovery System" (MACRS). But with cost segregation, components can be broken out and depreciated over 5, 7, or 15 years.

This accelerates depreciation into the first 5, 7, or 15 years versus spreading deductions over decades. The time value of money makes accelerating depreciation very powerful.

Cost segregation can enable multifamily property owners to:

• Enhance cash flow
• Improve return on investment metrics
• Reduce taxes upon sale via a higher cost basis
• Increase valuations and equity positions
• Increase net operating losses (NOLs)

Now let's examine some common myths about using cost segregation for multifamily assets.

Myth #1 - Cost Segregation is Only for New Construction

Truth: Cost segregation can benefit both new development and existing properties.

In fact, existing properties with substantial past capital improvements present prime opportunities. Cost segregation allows "looking back" and recapturing past expenditures that were incorrectly depreciated over long lives.

IRS rules even allow amending prior tax returns to claim missed depreciation. Capturing this "missed depreciation" generates significant tax refunds and savings.

For new construction placed in service in 2024, the bonus depreciation rate is 60%, down from 100% between 2017-2022. This still allows substantial accelerated depreciation deductions.

Whether new construction or existing assets, cost segregation enhances returns by accelerating depreciation into the early years of ownership. The benefits apply to any commercial or multifamily real estate.

Myth #2 - The IRS is Suspicious of Cost Segregation

Truth: Not only does the IRS accept cost segregation, but it also has procedures to govern proper implementation..."

The rest of the content remains the same. I've updated the bonus depreciation rates to reflect 2024 and highlighted the changes from the previous 100% rate that was in effect from 2017-2022. Please let me know if you need any other updates!

Myth #3 - The Benefits are Minimal for Multifamily vs Other Property Types

Truth: Multifamily properties realize substantial benefits from cost segregation.

Cost segregation accelerates depreciation for all major components/systems of a multifamily complex:

• Site work - curbing, sidewalks, landscaping, outdoor lighting, parking lots, recreational facilities
• Building exterior - roofing, siding, windows, doors, balconies, stairwells
• Interior - flooring, partitions, wall finishes, cabinets, appliances
• Electrical - wiring, lighting fixtures, emergency systems
• Plumbing - pipes, drains, water heaters, sprinklers
• HVAC - air conditioning, ventilation, heating
• Elevators - equipment, shafts, cabs

Just these categories alone can generate hundreds of thousands in first-year depreciation. This produces major tax and cash flow benefits over decades of ownership.

Myth #4 - The Studies are Expensive and Complex

Truth: Technology advances have made cost segregation affordable and accessible.

In the past, high consulting fees and complex engineering-based studies limited adoption. Today's computer-driven modeling streamlines the process at much lower cost.

Reputable firms offer cost-effective bundled pricing. For a 200-unit property, a full study often costs $10,000 - $15,000. With tax savings exceeding $100,000+, the ROI is excellent.

The process is straightforward. Provide property information like total cost basis and unit/amenity details. Through an in-person site inspection and utilization of a modeling software components are classified into proper MACRS categories. The deliverable is an IRS-approved report for your CPA to implement.

Myth #5 - The Benefits are One-Time Only

Truth: Proper maintenance sustains benefits over long-term ownership.

Cost segregation accelerates deductions into the first 5, 7 or 15 years. But the impact is not just a one-time event.

Ongoing capital improvements and renovations allow new components to be segregated annually. This repeatedly pushes fresh deductions into early years over the entire hold period.

Proper documentation and component tracking are key to sustaining benefits long-term. Consulting firms provide this asset management support.

The cumulative result over decades is far greater than a single upfront study. Cost segregation advantages compound year after year when properly maintained.

Unlock the Power for Your Multifamily Assets

The bottom line - multifamily properties gain substantially from cost segregation despite common myths.

The numbers add up quickly:

• New Construction - $750,000+ in first-year deductions on $15 million development
• Existing Property - $350,000+ in tax refunds plus ongoing savings

Cash flow and valuation impacts can each exceed $1 million over 10 years of ownership.

To learn more and get custom projections for your multifamily properties, contact Specialty Tax Group. Our specialists can illustrate the power of cost segregation specifically for your assets and objectives. We offer complimentary assessments to show the tax benefits for your portfolio.

With customized numbers in hand, the advantages of cost segregation become clear. Our team makes the process smooth from initial evaluation through IRS-compliant implementation.

Don't leave this tax strategy untapped for your multifamily investments. Debunk the myths and accelerate your returns through proven cost segregation techniques. Contact us today to unlock the benefits.