How Cost Segregation Transforms Multifamily Tax Strategy
- Greg Pacioli
- Sep 16
- 3 min read
When I first dipped my toes into real estate, I started where most people do, with single-family rentals. While they have their place, it didn’t take long for me to want to go bigger.
One vacancy and my cash flow was gone.
One repair and my profits for the year disappeared.
I was working for the property, instead of the property working for me.
Then I discovered an opportunity in a multifamily property. More units under one roof means diversified income, being able to scale, and a much more resilient investment. A vacancy in one unit barely made a dent. A roof replacement was shared across 10 to 20, tenants, not just one.
Multifamily just made sense.
I also uncovered one of the most beneficial tax strategies available to real estate investors... cost segregation.
If you’re reading this blog, you’re probably familiar with cost segregation. You’re seeking smarter ways to retain more of your hard-earned money.
Combining multifamily investing with cost segregation is one of the smartest and worthwhile strategies out there...
this is the way.
I’m here to help you navigate through it.
By now, you probably have a good grasp of what cost segregation is. If you're still in the dark, check out this article!
Why Multifamily Properties are Attractive for Cost Seg
Not all real estate is created equal when it comes to cost segregation. Multifamily properties often yield particularly high benefits. Why?
High Concentration of Short-Life Assets
Think about it: dozens of kitchens, appliances, flooring sets, lighting fixtures, and bathrooms all under one roof. That’s a goldmine of 5 and 7-year property waiting to be accelerated.
Tenant Turnover = Frequent Updates
Multifamily owners often replace flooring, appliances, or cabinets when tenants move out. Cost segregation helps maximize deductions for these replacements.
Strong Cash Flow & Tax Shield
Multifamily investments already generate steady rental income. Accelerating depreciation through cost segregation allows you to shelter more of that income from taxes.
Real-World Example
Let’s say you buy a 20-unit apartment building for $4 million (with $3.6 million allocable to the building after land value is excluded).
Without cost segregation: You get about $130,909/year in depreciation ($3.6M ÷ 27.5).
With cost segregation: You might reclassify 25–30% of that cost into 5, 7, and 15-year property. That could give you $900,000+ in deductions in Year 1 (especially with bonus depreciation back in play).
Instead of waiting decades, you’ve got a massive deduction today... cash you can use to reinvest, renovate, or expand your portfolio.
The IRS Is Fine With This, If You Do It Right
Before you start making wild guesses about which assets need to be reclassified. The IRS actually mandates a formal cost segregation study, usually carried out by engineers and tax experts who really know the ins and outs of the rules. When done right, it’s rock solid. But if it’s done poorly, it could definitely raise some red flags.
And don’t forget... if you ever decide to sell the property, depreciation recapture will kick in. That’s why it’s so important to plan ahead with your CPA or tax advisor. Cost segregation isn’t a “one-size-fits-all” approach; it has to align with your overall financial strategy.
Who Should Consider Cost Segregation on Multifamily Properties?
Investors buying or renovating multifamily real estate (especially $500k+ purchase price).
Owners with high current taxable income who need deductions now.
Those planning to hold long-term and benefit from the ongoing cash flow shield.
Even smaller multifamily properties, like duplexes can benefit, but the big wins tend to come with mid-sized and large apartment buildings.
My Two Cents
If you’re investing in multifamily and you aren’t exploring cost segregation, you are leaving money on the table. Why not turbocharge your tax savings, free up cash for reinvestment, and accelerate your path to financial freedom.
As always, talk with a qualified tax professional who understands real estate + cost segregation.
Find an advisor who lives and breathes these strategies.
The wealthy don’t just make money, they keep it.
Cost segregation for multifamily properties is one of the smartest, most proven ways to do exactly that.
👉 If you own a multifamily property, ask your tax advisor:
The answer might just put six figures in tax savings back in your pocket.