Are Apartment Buildings Commercial or Residential?
Apartment buildings are both, depending on who is asking. For financing, a building with 5 or more units is commercial real estate: it gets a multifamily loan sized on its income, while 1 to 4 units get a residential mortgage. For federal tax, a rental apartment building is "residential rental property," depreciated over 27.5 years rather than the 39 years used for commercial buildings. For zoning it is a residential use, and for property tax the class depends on your state or city.
Investors hear "commercial multifamily" from brokers and "residential rental" from their accountant, and both are right. This guide goes context by context, with sources, so you know which label applies to the question in front of you.
What do lenders say?
The clearest dividing line is in lending, and it falls at 5 units.
- 1 to 4 units: residential. HUD's handbook limits FHA's single-family programs to "one- to four-family Properties that are owner-occupied Principal Residences" (HUD Handbook 4000.1), and the VA's purchase loan covers a home of up to 4 units (VA). These loans look mostly at the borrower's income and credit.
- 5 or more units: multifamily. Fannie Mae's multifamily term sheet requires "properties with a minimum of five units" and a minimum debt service coverage ratio of 1.25x (Fannie Mae), and HUD's multifamily guide says each insured property "must consist of five or more dwelling units" (HUD MAP Guide). These loans are sized on the building's net operating income, appraised on income, and usually made to an LLC rather than a person.
That is why a 6-unit building and a 300-unit building are both "commercial multifamily" to a lender, and a fourplex is not. For what the 5+ unit loans look like, see Fannie Mae and Freddie Mac small balance loans, and for the 1 to 4 unit side, can you buy an apartment building with an FHA or VA loan?.
What does the IRS say?
For depreciation, apartments are residential, whatever their size. IRS Publication 527 defines residential rental property as "any real property that is a rental building or structure ... for which 80% or more of the gross rental income for the tax year is from dwelling units," and lists a 27.5-year recovery period under the General Depreciation System (IRS Publication 527). Publication 946 defines nonresidential real property as section 1250 property "such as an office building, store, or warehouse, that is neither residential rental property nor property with a class life of less than 27.5 years," which is depreciated over 39 years (IRS Publication 946).
A worked example shows why the label matters. All numbers are hypothetical, for illustration only, and ignore the first-year mid-month convention:
| Building | Depreciable basis (building, not land) | Recovery period | Yearly depreciation |
|---|---|---|---|
| 40-unit apartment building | $3,000,000 | 27.5 years | $109,091 |
| Office building, same basis | $3,000,000 | 39 years | $76,923 |
| Difference | $32,168 a year |
How it works: $3,000,000 / 27.5 = $109,091; $3,000,000 / 39 = $76,923. The 80% test can bite on mixed-use buildings: if ground-floor shops bring in more than 20% of gross rent, the building may not qualify as residential rental property. Ask the deal's accountant. For how depreciation flows to investors, see cost segregation; part of that depreciation can be taxed again when the building is sold.
The IRS also excludes buildings where more than half the units are used on a transient basis, such as hotels. A building run mostly as short-term rentals may not be residential rental property.
What does zoning say?
Zoning codes classify land by use, and apartments are a residential use, usually in a multifamily or mixed-use district. The owner being an LLC or a fund does not change that. The details are entirely local: each city's code decides how many units are allowed per lot, parking, height and whether ground-floor commercial space is permitted. When you underwrite a deal, check that the current use is legal under the zoning code and whether any units are "legal non-conforming," which can limit rebuilding after a loss. The city or county planning office and its online zoning map are the place to start.
What about property taxes?
Property tax classes are set by each state, and sometimes each city, so there is no national answer. New York City is a useful example because its classes split residential buildings by size. The NYC Department of Finance says Class 1 "includes most residential property of up to three units," Class 2 "includes all other property that is primarily residential, such as cooperatives and condominiums," and Class 4 includes properties such as "offices, factories, warehouses, garage buildings" (NYC Department of Finance, glossary).
| NYC tax class | What it covers | Tax rate, tax year 2026 |
|---|---|---|
| Class 1 | Most residential property of up to three units | 19.843% |
| Class 2 | All other primarily residential property, including rental apartment buildings | 12.439% |
| Class 4 | Commercial property such as offices, stores and warehouses | 10.848% |
Source: NYC Department of Finance, property tax rates. The rate applies to assessed value, and NYC assesses Class 1 at 6% of market value and Classes 2 and 4 at 45% (NYC Department of Finance), so a higher rate does not mean a higher bill. The point for investors: in New York City, a 40-unit rental building is taxed as residential (Class 2), not commercial (Class 4). Other places draw the line differently, and taxes often change after a sale; see property tax reassessment.
So which is it in each context?
| Context | 1 to 4 units | 5 or more units |
|---|---|---|
| Lending | Residential mortgage (FHA, VA, conventional) | Commercial or multifamily loan (agency, bank, HUD multifamily) |
| How the loan is sized | Mainly the borrower's income and credit | Mainly the property's net operating income |
| Federal depreciation | Residential rental property, 27.5 years | Residential rental property, 27.5 years (if 80% of gross rent is from dwelling units) |
| Zoning | Residential use | Residential use, usually a multifamily district |
| Property tax class | Varies; NYC Class 1 up to three units | Varies; NYC Class 2 for larger residential buildings |
| Valuation | Mostly comparable sales | Mostly income (NOI and cap rate) |
| How brokers and investors describe it | Residential or "small multifamily" | Commercial multifamily |
Why does the label matter to investors?
Because each label brings different rules to your money. If you invest in a 5+ unit syndication:
- Value moves with income and cap rates, not with nearby home sales. See what is a good cap rate.
- The loan is commercial: non-recourse with carve-outs in many agency loans, with prepayment penalties and maturity dates that shape the exit.
- The tax treatment is residential, which is why investors receive depreciation through their K-1.
- Property quality is described in classes (A, B, C) that brokers define, not the law; see apartment property classes.
How DoorRaise fits in
DoorRaise works only with buildings of 5 or more units, the commercial multifamily side of the line. Sponsors use it to raise equity from their friends and followers with verified accredited investors, under Rule 506(b) or 506(c). DoorRaise forms the deal's LLC, prepares the offering documents, files Form D and verifies accreditation for 506(c) deals. Investors fund by wire into escrow at Enterprise Bank & Trust, an FDIC-insured bank. Fees are $1,500 to set up (non-refundable), $5,000 at closing (only if the deal closes) and $3,500 a year.
Raise your apartment deal from the people who already follow you.
DoorRaise is built for apartment buildings with 5 or more units: one link for the deal, escrow until closing and a standard fee card.
New to the asset class? Read what is multifamily syndication. Sponsors can see how DoorRaise forms the deal's LLC and see pricing.
FAQ
Are apartment buildings commercial or residential?
Both, by context. Lenders treat 5 or more units as commercial multifamily; the IRS treats rental apartment buildings as residential rental property; zoning treats them as a residential use; and property tax classes vary by place.
Is multifamily commercial or residential?
For lending and valuation, multifamily with 5 or more units is commercial real estate. For federal depreciation it is residential rental property, depreciated over 27.5 years.
Are apartment complexes commercial real estate?
In the lending and investment market, yes. They are financed with commercial multifamily loans and valued mainly on net operating income.
Is multifamily considered commercial for taxes?
Not for federal depreciation: if 80% or more of the gross rent comes from dwelling units, it is residential rental property. Local property tax classes differ; New York City, for example, taxes larger residential buildings in Class 2, separate from commercial Class 4.
Is a fourplex commercial or residential?
Residential for lending: one to four units can be financed with residential mortgages, including FHA and VA loans if the owner lives in one unit.
Sources
- IRS Publication 527 (2025), Residential Rental Property
- IRS Publication 946 (2025), How To Depreciate Property
- HUD, Single Family Housing Policy Handbook 4000.1
- U.S. Department of Veterans Affairs, VA-backed purchase loan
- Fannie Mae Multifamily, Conventional Properties term sheet
- HUD, Multifamily Accelerated Processing (MAP) Guide, March 2021 revision
- NYC Department of Finance, glossary (tax classes)
- NYC Department of Finance, property tax rates
- NYC Department of Finance, determining your assessed value
This article is general information, not legal, tax or investment advice. Ask a tax adviser about depreciation and a local expert about zoning and property tax. DoorRaise is not a law firm, broker-dealer, investment adviser or funding portal.