Multifamily buildingThe multifamily market remains consistently steady and robust, even through the challenges of late.  Along with providing the opportunity to earn rental income, multifamily projects offer a number of tax benefits to the thoughtful investor.  In fact, we’re finding that investors view the tax savings associated with cost segregation as a major reason to consider the multifamily sector.  Recent provisions in the CARES Act and TCJA have brought depreciation deductions to an all-time high, and this continues to drive interest in multifamily, particularly at a time when cash flow is all-important.

Here are just some of the factors making multifamily properties more attractive than ever:

  • The Tax Cuts and Jobs Act (TCJA) brought 100% bonus depreciation through the end of 2022, and made acquired assets eligible for said bonus.
    • Property ABC, a garden apartment complex, was acquired and placed-in-service in September of 2018. The facility consisted of 85 two-story residential buildings, containing 538 apartments, plus nine storage buildings.  The total depreciable basis was $37,445,200.  Capstan engineers were able to move 18.7% of assets into 5-year personal property, and another 7% of assets into 15-year land improvements, resulting in a first year tax savings of $3,142,872.
  • The CARES Act from March 2020 also brings benefits for investors of multifamily projects. Specifically, the CARES Act removed two unfavorable loss limitations that many real estate investors would encounter: the 80% net operating loss limitation and the $500K overall loss limitation.
    • 80% Net Operating Loss Limitation: Before the CARES Act, investors could only utilize net operating losses from business activities, including real estate activities, up to 80% of their taxable income. The results of accelerating depreciation deductions via a cost segregation study often creates a favorable net operating loss to investors. Now that the 80% limitation has been suspended for 2019 and 2020, investors can enjoy the full benefit of their net operating losses.
    • $500K Overall Loss Limitation: An overall loss limitation of $500K (married taxpayers) was imposed before the CARES Act. In general, this meant that even if your cost segregation study was extremely successful, in any one year, each investor could only currently deduct a maximum overall loss of $500K from their business activities, including real estate activities, with the excess being carried forward each year. This is similar to the overall loss limitation of $3K most taxpayers are familiar with on their stock losses. This provision was also suspended by the CARES Act for 2018, 2019 and 2020.
  • The Tangible Property Regulations (TPRs) are still very much in play, augmenting the utility of the newer legislation. The TPRs guide the taxpayer in making expense and capitalization decisions, and BAR and Materiality testing helps ensure that all possible assets are expensed.  All of Capstan’s Cost Segregation reports include Unit of Property data that is used in making expense vs capitalization decisions.
  • Partial Asset Dispositions are very useful in a renovation scenario. If a multifamily property was purchased and renovated, the remaining depreciable basis of the discarded assets may be immediately written off in the current year.  Data generated by a Capstan Cost Segregation report can be used to produce and support disposition tables.
    • In December of 2019, Project ABC (above) underwent a renovation with an associated depreciable basis of $3M. The same Capstan engineer returned to the property to document the discarded assets.  He was also able to move 32% of the new assets into 5-year.  Between both strategies the first year tax savings on the renovation was $325,000.
  • Energy-efficient tax incentives are in play for multifamily properties placed-in-service before 12/31/2020. The EPAct 179D deduction is a great option for multifamily facilities that are 4 or more stories high, and the deduction is per square foot — up to $1.80/sf — so the bigger the better.  The 45L tax credit is extremely popular right now, and condos, townhouses, and apartment buildings that are a maximum of three stories high are all solid candidates.  The credit is $2,000 per unit, so the savings can really multiply.
    • Example: A large multifamily property was placed-in-service on the east coast in 2020. The total square footage was 85,000, and the property was eligible for the maximum EPAct 179D deduction of $1.80/SF.  The total deduction benefit was $153,000, resulting in an actual tax savings of $61,200, on top of tax savings from accelerated depreciation and other strategies.
    • Example: A 90 unit garden-style property was newly constructed in Northern Florida in 2019. Each unit met the eligibility criteria for a 45L tax credit.  At $2,000 per unit, the total tax credit was $180,000.

If you routinely invest in multifamily property or you are considering an investment in this property type, you will find the tax savings associated with this property type are consistently beneficial for the investor.  The key to achieve these tax savings is a quality cost segregation study.  The study will allow you to leverage a combination of strategies old and new, increasing cash flow, reducing tax liability, and teeing you up for better days ahead.