If you invest in multi-unit dwellings and apartment dwellings and are looking for serious tax advantages, it’s important to understand accelerated depreciation in multifamily real estate.
This strategy lets you take larger depreciation deductions early on in a property’s life — which means that you can lower your taxable income and boost your after-tax cash flow right from the start when expenses are still high and income may be ramping up.
Using cost segregation for real estate investors is one of the most effective ways to unlock these early deductions.
This IRS-approved method essentially breaks your property into parts that depreciate over 5, 7, or 15 years — rather than the standard 27.5 — so that you can front-load your write-offs.
And with bonus depreciation in 2025 continuing its phase-down, timing and strategy matter more than ever.
This blog walks you through how accelerated depreciation works, how cost segregation fits into the picture, and how to apply smart multifamily tax strategies to maximize your returns on your multifamily investment — all without crossing IRS lines.
What is depreciation in real estate?
“Depreciation” is a tax deduction that allows property owners to recover the cost of an income-generating building over time. It is a non-cash expense recognized annually on your tax return.
Why is this allowed? Because even though the property may be appreciating in market value, the IRS assumes that it’s wearing out — and lets you deduct a portion of that cost each year.
The IRS treats buildings as assets with a limited useful life.
Even if a multifamily property’s market value goes up, the physical structure still experiences wear and tear over time because of aging systems and normal tenant use.
Depreciation acknowledges this gradual deterioration and allows you to deduct a portion of the building’s cost each year.
This helps match expenses to the income the property generates and ultimately provides a fairer picture of taxable profit.
For residential multifamily real estate, the standard depreciation method is straight-line depreciation over 27.5 years.
That means you deduct an equal portion of the building’s value (excluding land) each year.
For example, if your multifamily building is worth $1.1 million (excluding $100K land value), your annual depreciation would be roughly $40,000.
If it’s worth $2.75 million (excluding $250K land value), then your annual depreciation would be roughly $90,909.
This deduction helps offset taxable income from rental operations, which lowers your overall tax liability and effectively improves your net cash flow even if you do not collect a dollar more in rent.
It’s also arguably one of the main reasons why multifamily real estate remains one of the most tax-efficient investment classes available.
Compared to passive investments like REITs or index funds, for example, multifamily buildings give you more control over performance and access to tax strategies that aren’t available to stockholders — like deducting operating expenses and using depreciation to reduce taxable income.
These advantages can boost your after-tax cash flow in ways traditional equities simply can’t.
What is accelerated depreciation?
Accelerated depreciation in multifamily real estate is the practice of expensing certain components of a property more quickly than the 27.5-year straight-line schedule.
The most common way to do this is through cost segregation, which allows real estate investors to break out individual elements of a building (like appliances, flooring, and landscaping) and depreciate them over shorter periods — typically 5, 7, or 15 years.
This strategy effectively “front-loads” tax deductions. Instead of evenly spreading the tax benefit across decades, you claim a larger portion of it early, therefore reducing your taxable income during the years when you might need it most (such as right after acquisition or renovation).
In doing so, accelerated depreciation in multifamily real estate can enhance your cash-on-cash returns and shorten the time it takes for you to recoup your investment.
How cost segregation unlocks accelerated depreciation
Cost segregation is a tax planning technique that identifies and reclassifies building components that qualify for shorter depreciation lives under the Modified Accelerated Cost Recovery System.
Rather than depreciating everything over 27.5 years, tax professionals conduct a qualified engineering-based cost segregation study to analyze the property in detail and reclassify specific assets into shorter depreciation categories:
5-year property:
These include items inside the building that wear out more quickly, such as appliances, carpeting, cabinetry, light fixtures, and furniture. Because they don’t last as long as the structure itself, you can write them off over just five years.
7-year property:
This bucket typically covers certain types of office equipment or specialized machinery used on the premises.
These assets support property operations but aren’t integral to the building itself. They are not as common in residential multifamily settings but can still apply in specific cases. For example:
- Office desks and chairs in an on-site leasing office
- Filing cabinets and storage units used for property management
- Computers, printers, and other administrative tech equipment
- Certain types of maintenance tools or specialty machinery not permanently installed
15-year property:
These are exterior improvements like driveways, walkways, fences, retaining walls, drainage systems, and landscaping. Though they have a longer useful life than interior finishes, they still qualify for faster depreciation than the building itself.
Here’s a simplified example:
Let’s say that you purchase a $2 million multifamily property.
After commissioning a cost segregation study, you discover that $600,000 of the asset qualifies for accelerated depreciation in the first year.
You can use that $600,000 deduction to offset rental income or even other passive income, depending on your tax position.
Note that you need to commission an engineering-based cost segregation study for real estate to ensure that your depreciation strategy complies with IRS standards.
This study will give you the detailed documentation that the IRS requires to support how you classify building components.
It also protects you in the event of an audit. Without it, you risk misclassifying assets and overstating deductions, or even leaving money on the table.
If you plan to use accelerated depreciation in multifamily real estate, be sure to work with a firm that specializes in cost segregation and has both tax and engineering expertise.
Most experienced advisors won’t recommend moving forward without one.
Bonus depreciation and Section 179 (2025 update)
As a multifamily investor, you may be wondering how much of your property upgrades or equipment purchases you can deduct upfront in 2025.
The answer depends on two key tax provisions: bonus depreciation and Section 179 expensing.
Bonus depreciation (2025 phase-down)
You can still use bonus depreciation in 2025 — but the window is narrowing. Under the Tax Cuts and Jobs Act (TCJA), bonus depreciation allowed multifamily building owners to write off 100% of the cost of qualifying property in the year it was placed in service.
That full deduction applied through 2022, but the benefit has been phasing down since:
- 2023: 80%
- 2024: 60%
- 2025: 40%
- 2026: 20%
- 2027 and beyond: 0%
In practical terms, this means that in 2025, you can write off 40% of the cost of qualified property — such as appliances, flooring, fixtures, and other items identified in a cost segregation study — as soon as it’s placed into service.
These assets must have a useful life of 20 years or less, which includes many non-structural components in a multifamily building.
Bonus depreciation is particularly useful for larger multifamily deals because:
- There’s no dollar limit on how much you can deduct.
- You can claim it regardless of your income level or whether you have active income.
- It can create or increase net operating losses that you may carry forward.
Section 179
While Section 179 also lets you deduct the full cost of qualifying property upfront, it comes with more restrictions:
- The deduction limit for 2024 is $1.22 million.
- The benefit starts to phase out once total purchases exceed $3.05 million.
- It’s subject to taxable income limitations, so you can’t use it to create a loss.
- It’s generally more common in smaller businesses with fewer capital expenditures.
Note that Section 179 doesn’t apply to all types of property in a multifamily real estate setting. It’s typically used for things like business vehicles, office equipment, or small-scale upgrades tied to a property management operation — not the building itself.
Which one should you use? If you’re investing in multifamily and want to maximize early-year deductions without hitting income or dollar limits, bonus depreciation may be the best tool — at least for now. But because it’s set to phase out completely after 2026 (unless Congress extends it), you need to time your investments and cost segregation studies well.
Talk to your tax advisor or to an accountant familiar with multifamily assets if you need help applying these rules to your deal.
Key benefits of accelerated depreciation in multifamily CRE
- Larger early-year deductions reduce taxable income and allow you as a multifamily investor to keep more of your rental revenue.
- More tax savings mean a faster payback period and better returns (particularly in the first few years).
- You have the freedom to reinvest your tax savings into property upgrades or acquire new multifamily assets to scale your portfolio faster.
- Qualifying investors can use accelerated depreciation to offset other passive income.
Risks, limitations, and compliance considerations
- High-quality engineering-based cost segregation studies can cost several thousand dollars (though the savings usually outweigh the expense).
- Improperly classifying assets or failing to maintain adequate supporting documentation can trigger audits. This is why it’s very important to work with experienced tax advisors and engineers.
- If you sell the property, the IRS may recapture some of the depreciation deductions at a higher tax rate and reduce your profit.
Also Read – What is accelerated depreciation on a rental property, and how does it work?
Conclusion
For as long as you do it correctly, accelerated depreciation in multifamily real estate is one of the best multifamily tax strategies available. You can use it to improve your building’s cash flow and grow your CRE portfolios faster.
Are you also looking for CRE loan solutions for a multifamily building? Tell your CRE finance experts about your project. Call Private Capital Investors at 972-865-6206.
