Cost Segregation for Apartment Complexes

Residential Rental Property includes a wide variety of categories including; single family seaside housing along the California coast; high rise towers in New York; multi-use properties in Oregon, and garden style complexes in Texas. Residential Rental Property is property where 80% or more of the gross rental income is rental income derived from dwelling units in which more than 50% of the units are leased on a non-transient basis. A property that qualifies as a Residential Rental Property has a depreciable life of 27.5 years.

Units generally have glued on finishes, fully appointed kitchens, laundry facilities, and millwork of varying complexity. Properties often include amenities such as swimming pools, workout rooms, and clubhouses. Tennis, racquetball, and basketball courts are somewhat less common. One recent trend is for properties to install solar panels, often on top of carports.

Accelerating the depreciation on 15% – 40% of the capitalized costs is typical, depending on the type of Residential Rental Property, number of amenities, quality of the finishes, and extent of the site improvements.

Case Study – Garden Style Apartment Complex

Facts

The subject property is an eighteen building, 144 unit, garden style apartment complex that was acquired for $6,700,000 and placed-in-service in 2018. It totals 113,000 square feet and sits on a 6.75 acre site.

As with many garden style apartment complexes, the site is improved with ample parking but simple landscaping. The entire property is fenced in with motorized gate access. Somewhat unusual to garden apartments, the property does not have a swimming pool.

The buildings are two-story, wood frame structures, with brick facades and asphalt shingle roofs. Interior finishes such as carpeting, vinyl flooring and cabinetry are of average quality as are the kitchen appliances.

Execution

The Source Advisors Cost Segregation engineers analyzed the construction costs, in the form of contractor invoices, and allocated the cost detail to various trades and building components. They conducted detailed estimates from the construction drawings and augmented those findings with additional estimates performed during the site visit of the property. Key property personnel were also interviewed. A detailed report was delivered, identifying and documenting all of the components that qualify for a shorter tax life.

Result

Source Advisors reclassified 11% or $737,000 as 15-year land improvements and 29% or $1,943,000 as 5-year tangible personal property. This leans towards the high end of the expected range and was due to the number of kitchen appliances and laundry equipment acquired with the property.

*Assuming a 35% tax rate, 6% discount rate, and that the property will be held for 39 years