How Apartment Investors Are Using 100% Bonus Depreciation in 2026

If you own an apartment community, this may be the best year in over a decade to look at cost segregation. The One Big Beautiful Bill Act permanently restored 100% bonus depreciation for qualified property acquired after January 19, 2025 — no phase-down, no sunset. For multifamily owners, that changes the math on a strategy that was already one of the most effective tools in commercial real estate tax planning.

Why This Matters for Multifamily

Apartment communities are depreciation-rich. A typical property includes not just the building shell, but parking lots, landscaping, site lighting, fencing, flooring, cabinetry, appliances, specialty plumbing and electrical for kitchens and baths, and common-area amenities like pools, fitness centers, and clubhouses. Under standard IRS depreciation tables, all of that gets lumped into 27.5-year residential rental property. A cost segregation study identifies which components actually qualify for much shorter recovery periods — 5, 7, or 15 years — and with 100% bonus depreciation back in force, those reclassified costs can potentially be deducted in year one instead of trickling out over nearly three decades.

Consider a hypothetical investor who acquires a 120-unit apartment community for $18 million, with land value allocated at $3.6 million and the depreciable building basis at $14.4 million.

Under standard straight-line depreciation, that $14.4 million would be written off over 27.5 years — roughly $524,000 per year.

A cost segregation study on a property like this typically reclassifies somewhere between 20% and 35% of depreciable basis into 5-, 7-, and 15-year property, depending on unit finishes, amenity package, and site improvements. Using a illustrative 25% reclassification rate, that's roughly $3.6 million shifted into shorter-life categories — and under current law, that entire amount could be eligible for 100% bonus depreciation and deducted in the placed-in-service year, rather than depreciated over decades.

That is not a guaranteed outcome for any specific property — actual reclassification percentages, useful lives, and bonus eligibility depend on the engineering study, acquisition date, and how the property is used. But the range above reflects what's typical for garden-style and mid-rise multifamily assets, based on industry cost segregation benchmarks.

Cost segregation is an engineering-based tax study that breaks a real property purchase into its component parts and reclassifies eligible components from long-life real property (27.5 or 39 years) into shorter-life personal property and land improvements (5, 7, or 15 years). It's grounded in longstanding IRS guidance, including the component depreciation principles from Hospital Corporation of America v. Commissioner, and the current IRS Cost Segregation Audit Techniques Guide. The result is accelerated depreciation deductions — and, with 100% bonus depreciation currently available, the potential to take those deductions immediately rather than over many years.

Partial Asset Disposition (PAD) is a companion strategy that matters most when a property is renovated rather than newly acquired. When you replace a roof, resurface a parking lot, or gut-renovate unit interiors, PAD allows you to write off the remaining undepreciated basis of the components you removed — instead of continuing to depreciate something that no longer exists while also depreciating its replacement. For multifamily owners doing rolling unit renovations or common-area upgrades, a PAD study run alongside (or shortly after) a cost segregation study can capture losses that would otherwise sit unclaimed on the books indefinitely.

For multifamily investors, the appeal isn't the tax deduction in the abstract — it's what accelerated depreciation does to liquidity. Deductions taken in year one, rather than spread over 27.5 years, can meaningfully reduce taxable income in the year a property is placed in service, freeing up cash for renovations, reserves, debt paydown, or the next acquisition. For investors actively growing a portfolio, that timing advantage compounds: each acquisition can generate a fresh wave of accelerated depreciation, and paired with a 1031 exchange strategy on the disposition side, tax liability can be managed across an entire holding period rather than absorbed in a single event.

Cost segregation tends to make the most sense for:

Apartment communities purchased, built, or substantially renovated within the last several years; owners with sufficient passive income or real estate professional status to use the resulting losses currently; investors planning a renovation or capital improvement program where PAD can be layered in; portfolios where an investor is weighing a 1031 exchange and wants to understand depreciation recapture exposure beforehand; and properties large enough that engineering study fees are justified by the expected deduction — typically $2 million or more in depreciable basis, though smaller properties can still pencil out.

Not all cost segregation work is equal. The IRS Audit Techniques Guide is explicit that a defensible study is engineering-based — meaning it involves an on-site inspection, cost documentation tied to actual construction or purchase records, and a qualified preparer, not a desktop percentage estimate applied to a purchase price. A properly documented study is your best protection in the event of an audit, and it's the difference between a strategy that holds up and one that creates exposure down the road.

The figures above are illustrative, not a projection for any specific asset. Actual outcomes depend on acquisition date, purchase price allocation, unit mix and finish level, site improvements, your basis in the property, your overall tax situation, and current law at the time the study is performed. Bonus depreciation percentages and depreciation rules have changed several times in recent years and can change again — any strategy should be evaluated against the law in effect when you file, not assumed from a prior year.

Does cost segregation apply to properties I already own, or only new purchases? Both. It's commonly done in the year of acquisition, but a "look-back" study can be performed on properties acquired in prior years, with the catch-up depreciation claimed through a change in accounting method (Form 3115) without amending prior returns.

Is 100% bonus depreciation available for all multifamily property acquired in 2026? It applies to qualified property acquired and placed in service after January 19, 2025, under current law. Property acquired before that date under different transition rules may follow different percentages — this is worth confirming with your tax advisor based on your specific acquisition date.

Does cost segregation trigger depreciation recapture I should worry about at sale? Accelerated depreciation increases recapture exposure (taxed as ordinary income, up to 25% for real property components, or potentially higher for personal property components) rather than eliminating tax liability altogether. Many investors manage this through a 1031 exchange at disposition.

How much does a cost segregation study cost, and is it worth it for a smaller apartment property? Fees vary by property size and complexity, but many providers offer a preliminary benefit estimate at no cost. For most properties with several million dollars in depreciable basis, the tax savings substantially outweigh the study fee — but it's worth getting the numbers run for your specific asset before committing.

Can I combine cost segregation with a 1031 exchange? Yes, and many multifamily investors do exactly that — using cost segregation to accelerate deductions during the hold period, then using a 1031 exchange to defer recapture and gain at sale. The two strategies work well together with proper planning.

If you own or are acquiring an apartment community and want to see what a cost segregation and partial asset disposition analysis could mean for your specific property, I'm happy to take a look.

Tom Murphy
(858) 342-1377
tom@murphytaxstrategies.com
Murphy Tax Strategies