Published by AE Tax Advisors Team • 2025-06-22

Mixed-Use Building (Retail + Apartments) Generates $208,000 in Savings

The Client

Sandra Yee owned a mixed-use building in Portland, Oregon -- ground-floor retail with 12 apartments above -- purchased for $3.1 million. The property generated $78,000 from retail leases and $168,000 from residential rents annually. Sandra also earned $95,000 from her graphic design business.

The Problem

Sandra's accountant was depreciating the entire building at a blended rate without properly allocating between commercial (39-year) and residential (27.5-year) components. No cost segregation had been performed on either portion. She was paying $82,000 per year in federal taxes.

Our Strategy

We first properly allocated the building between commercial and residential use based on square footage and income. Then we performed cost segregation on both portions. The study reclassified $198,000 in 5-year property (apartment appliances, cabinetry, flooring, retail buildout, specialized electrical), $112,000 in 7-year property (decorative lobby finishes, retail storefront systems), and $310,000 in 15-year land improvements (sidewalk, parking, landscaping, exterior lighting). Total accelerated: $620,000.

The Results

The accelerated depreciation eliminated Sandra's tax on rental income and offset her design business income. Total Year 1 savings reached $208,000 across federal and state taxes. Sandra used the cash to begin renovating four apartment units to increase rental rates.

Key Takeaway

Mixed-use buildings often receive the wrong depreciation treatment altogether. Properly allocating between commercial and residential portions -- then applying cost segregation to each -- can unlock significant hidden deductions.