Published by AE Tax Advisors Team • 2025-02-03

10-Unit Apartment Building Yields $87,000 in Year 1 Tax Savings

The Client

Denise Calloway, a real estate investor in Charlotte, North Carolina, owned a 10-unit apartment building she purchased for $1.65 million in 2023. Her portfolio also included two single-family rentals, and she earned $85,000 from a W-2 position as a property management consultant.

The Problem

Denise's prior CPA was depreciating the apartment building over 27.5 years with no cost segregation analysis, producing annual depreciation of roughly $48,000. She was paying $38,000 per year in federal taxes on her combined rental and W-2 income, and felt her tax strategy was leaving money on the table.

Our Strategy

Our team performed an engineered cost segregation study on the apartment building. The study identified 32% of the depreciable basis as eligible for reclassification -- $142,000 into 5-year property (appliances, flooring, cabinetry), $78,000 into 7-year property, and $112,000 into 15-year land improvements (parking lot, landscaping, fencing). With bonus depreciation, $332,000 in accelerated deductions became available in Year 1.

The Results

The accelerated depreciation generated a substantial paper loss that offset both her rental income and a significant portion of her W-2 earnings. Her federal tax bill dropped from $38,000 to zero, and she received a net benefit of $87,000 including carryforward losses she can apply in future years. Denise is now evaluating cost segregation studies on her single-family rentals as well.

Key Takeaway

Multi-unit apartment buildings are prime candidates for cost segregation because they contain numerous reclassifiable components -- from individual unit appliances and flooring to shared amenities and site improvements.