Cost segregation is a tax strategy that accelerates depreciation deductions on a multifamily property by identifying specific components (fixtures, landscaping, site improvements) depreciable over 5, 7, or 15 years instead of the standard 27.5 years.
A cost segregation study, performed by a specialized engineering firm, breaks an acquired property into its depreciable components. Items with shorter IRS-assigned lives (carpeting, appliances, landscaping, specific site improvements) are depreciated faster, producing larger early-year deductions.
Effect: accelerated depreciation reduces current-year income tax. Tradeoff: higher depreciation recapture tax at sale. Best suited for properties held 5+ years with high current income tax exposure.
LA multifamily buyers often commission cost segregation studies post-acquisition to maximize near-term depreciation. Sellers should understand the math because it affects what the buyer can pay — more accelerated depreciation supports stronger underwriting of the asset.
From the Sterman LA Multifamily Glossary — defined the way a broker with $1.41 billion across 254 closed transactions actually uses these terms.
Michael Sterman, Senior Managing Director Investments, Marcus & Millichap.
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