Cost Segregation for Apartment Syndications: 2026 Guide

Cost segregation is a tax study that splits an apartment building's cost into parts that depreciate faster, like appliances, carpet and parking lots, instead of depreciating everything over 27.5 years. Since the 2025 tax law, those faster parts generally qualify for 100% bonus depreciation if the property was acquired after January 19, 2025. In a syndication, that can create large paper losses on investors' K-1s. Whether investors can use those losses depends on the passive activity rules, and some of the benefit is paid back when the property sells.

What is cost segregation?

The IRS describes it in its Cost Segregation Audit Techniques Guide (Publication 5653): studies "are most commonly prepared for the allocation or reallocation of building costs to tangible personal property." Personal property and land improvements have shorter recovery periods than the building itself, so you deduct their cost sooner.

For new construction, the IRS calls a detailed engineering study based on actual cost records "the most methodical and accurate approach." For a building you buy, those records usually don't exist, so studies rely on detailed engineering cost estimates instead. The IRS also notes there are no prescribed qualifications for study preparers, so choose one carefully.

Which parts of an apartment building qualify?

Component	Recovery period	Examples
Residential rental building	27.5 years	Structure, roof, walls, plumbing and electrical serving the building
Personal property in rental units	5 years	Appliances, carpeting, furniture
Office furniture and equipment	7 years	Leasing office furniture and equipment
Land improvements	15 years	Parking lots, sidewalks, fences, landscaping
Land	Not depreciable	The land under the building

How does bonus depreciation work in 2026?

The One Big Beautiful Bill Act, signed July 4, 2025, made 100% bonus depreciation permanent for qualified property acquired after January 19, 2025. Before that, the rate had been phasing down by 20 points a year, to 40% for property placed in service in 2025.

Two details matter for sponsors:

The contract date. Under IRS Notice 2026-11, property counts as acquired when a written binding contract is signed. If the contract was signed before January 20, 2025, the shorter-life parts don't get 100% bonus depreciation. They get the old phased-down rate instead, 40% if placed in service in 2025.
Only shorter-life property qualifies. Bonus depreciation applies to the 5-, 7- and 15-year parts, not the 27.5-year building. Some states don't follow federal bonus depreciation, so ask your CPA how your state treats it.

A simple example

This example is illustrative only. It assumes the property was acquired after January 19, 2025 and qualifies for 100% bonus depreciation.

Item	Amount
Purchase price	$10,000,000
Land (not depreciable)	$2,000,000
Building basis	$8,000,000
Reclassified to 5- and 15-year property (25% of the building basis)	$2,000,000
Year-one bonus depreciation on reclassified property	$2,000,000
Full-year straight-line on the remaining $6,000,000	About $218,000
Year-one depreciation with a study	About $2.2 million
Full-year straight-line on $8,000,000 without a study	About $291,000

First-year straight-line amounts are lower in practice because of the mid-month convention. How much lower depends on the month the property is placed in service. If losses are shared by ownership, an investor who owns 2% of the LLC would be allocated about $44,000 of year-one depreciation, included in the rental loss figure on their K-1.

Can investors actually use the losses?

Often not right away. Under the passive activity rules, rental losses are generally passive for syndication investors. Passive losses can offset passive income, such as income from other rentals or syndications. Losses you can't use carry forward and are released when you sell your entire interest in a fully taxable sale.

No $25,000 allowance for limited partners. The $25,000 rental loss allowance requires active participation. You can't qualify if you own less than 10% of the activity, limited partners generally can't qualify at all, and the allowance phases out as income rises from $100,000 to $150,000.
Real estate professionals. To qualify, you need more than 750 hours and more than half your working time in real estate businesses you materially participate in. Even then, limited partners face strict tests, usually more than 500 hours a year in the rental activity. A CPA can tell you whether grouping your rentals helps.
Excess business loss limit. If your losses get past the passive rules, another limit applies. For 2026, net business losses above $256,000 ($512,000 for joint filers) can't offset other income that year. The excess becomes a net operating loss you carry forward.

What happens when the property sells?

Some of the benefit is paid back. Gain on personal property, up to the depreciation taken, is recaptured as ordinary income under Section 1245. Bonus depreciation on land improvements, like parking lots, is also generally recaptured as ordinary income to the extent it exceeds straight-line depreciation. Gain from straight-line depreciation on the building is "unrecaptured Section 1250 gain," taxed at a maximum 25% rate. Your K-1 in the year of sale will show these amounts. A study still helps by moving deductions earlier, but it isn't free money.

What does a study cost?

Engineering-based studies commonly cost about $3,000 to $15,000 or more, according to cost segregation firms, and lighter software reports cost less. Firms that do this work say studies typically move about 20% to 35% of a building's depreciable basis into shorter lives. These are industry figures, not IRS figures.

Missed it? You can catch up later

If you didn't do a study in the year you bought, you can generally catch up the missed depreciation later by filing Form 3115 for an automatic change in accounting method. The catch-up is usually taken in the year of the change. If only one return has been filed, the fix may be an amended return instead.

How DoorRaise handles tax reporting

The sponsor decides whether to order a cost segregation study, with the deal's CPA. DoorRaise's flat $5,000 fee covers the investor portal, distributions, K-1s, investor updates and a document vault, so investors get their tax documents in one place. See real estate syndication fees for how fees work.

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FAQ

Is cost segregation worth it for a small apartment building?

It depends on the purchase price, the cost of the study and how investors can use the losses. Compare the study's cost to the year-one deduction and the recapture on sale, with your CPA.

Does bonus depreciation apply to the whole building?

No. It applies to qualified property with shorter recovery periods, like the 5-, 7- and 15-year parts. The 27.5-year building isn't eligible.

Can syndication losses offset my salary?

Usually not for limited partners. Passive losses generally offset only passive income, and unused losses carry forward.

Will I owe tax when the property sells?

Likely. Faster depreciation on personal property and land improvements is generally recaptured as ordinary income, and building depreciation can be taxed at up to 25%.

Can a study be done after the first year?

Yes. A look-back study with Form 3115 can usually catch up missed depreciation in the year you file.

Sources

This post is general information, not tax advice. Talk to a CPA about your situation. DoorRaise is not a broker-dealer, investment adviser or funding portal.