Illustrative Multifamily Acquisition
A hypothetical apartment purchase used to show clubhouse (39-year), dwellings (27.5-year), site work (15-year), and appliances (5-year) on one ticket. Educational information, not tax advice.
Educational information, not tax advice.
Updated 2026-10-14
Assumptions
- Educational information, not tax advice.
- Assume a garden-style community operated as conventional year-long apartment rentals, not transient lodging.
- Assume dwelling buildings meet the 80% dwelling-unit test; the clubhouse is a separate nonresidential building.
- Assume construction invoices are missing. The study uses a documented cost-estimate approach plus inspection.
- Any dollar figures below are invented for arithmetic only. They are not a typical mix and not a client result.
Key takeaways
- One closing can include more than one building class: 27.5-year dwellings and a 39-year clubhouse on the same land.
- AmeriSouth is the caution against exploding apartments into a thousand 5-year lines.
- A written §1060 allocation, if one exists, is a Peco Foods risk — not a rule that every purchase is locked.
- Reconcile the study to the purchase price less land. Rule-of-thumb percentages without a takeoff are the weakest ATG method.
Picture a 120-unit garden community bought as a going rental. The file has a closing statement, an old survey, and limited drawings. Construction invoices are gone, so the study uses a documented cost-estimate approach and a site inspection. Suppose, for arithmetic only, a $12 million contract price of which $2 million is assigned to land. The remaining $10 million is the depreciable pool this illustration will divide. Those figures are invented. They do not claim a land ratio, a personal-property share, or tax savings.
The leasing clubhouse is analyzed as a separate 39-year building, following the IRS residential matrix. Dwelling buildings are 27.5-year if they meet §168(e)(2)(A). Parking, playgrounds, and exterior site work are typical 15-year land-improvement candidates (class 00.3). In-unit appliances are 5-year in that matrix. Interior millwork stays with the dwellings unless the facts support otherwise — AmeriSouth is the reminder.
Order of operations is the same as on a house, with more buildings. Land first. Then each building’s class. Then site work versus personal property. Then records and inspection. Then reconciliation. Then the CPA’s Form 4562. If a later look-back is needed, Form 3115 is generally the vehicle; eligibility is not decided here.
Missing records
Estimates must cite a cost source and add back to basis. Rule-of-thumb percentages without a takeoff are the weakest method in the audit guide. Publication 5653 ranks detailed engineering from actual cost records first, then documented cost estimates from contractors or reliable published sources, with volume, page, and item cited. Residual estimation, sampling, and rules of thumb sit further down. This illustration uses the cost-estimate path because invoices are gone, not because a percentage from another city is acceptable.
The audit guide also warns that a uniform step-up factor applied to force estimates to match purchase price is not an acceptable method. If the first takeoff misses the $10 million invented depreciable total, the report should explain the difference with quantities, location adjustments, and physical condition — not a silent multiplier. See the cost-estimation-and-reconciliation illustration.
AmeriSouth as a brake, not a template
AmeriSouth XXXII, Ltd. v. Commissioner, T.C. Memo. 2012-67, involved an apartment purchase and a study that broke the property into more than a thousand components. The Tax Court kept most contested items with the buildings. A small set remained with the taxpayer, including items such as dryer vents, gate components, irrigation outlets, surveillance equipment, and certain outlets. The opinion evaluated structural components against that apartment building type.
This illustration does not copy AmeriSouth’s kept list onto every garden community. It uses the case as a caution: listing a component on a schedule does not make it §1245 property. Cabinetry, unit wiring, and interior partitions that function as the dwelling’s structure generally stay 27.5-year property. Removable floor covering and appliances are the residential matrix’s clearer 5-year rows, still subject to inspection.
Written purchase allocations
Multifamily purchases of a going concern sometimes include a written allocation among land, buildings, and personal property, especially if §1060 applies. Peco Foods held that such a writing can bind the buyer. The ATG says it is unclear whether that extends beyond §1060 acquisitions. Do not assume every apartment closing is a Peco facts pattern, and do not ignore a writing that is in the file.
If the purchase agreement already assigned a lump sum to “building” with no room to subdivide, that is an upstream problem for the CPA. Quality review cannot invent a different allocation after the fact.
Site work and mixed building classes
The residential matrix treats a stand-alone clubhouse or rental office as nonresidential, 39-year property, even on a residential campus. Exterior pools and playgrounds on land are 15-year in that matrix; an interior pool attached to a residential building stays with the building. Parking lots, including striping and curbs, are usual 15-year candidates. A parking structure is a building, not a lot.
Landscaping that would be destroyed if the related depreciable asset were replaced can follow land improvements; leftover acreage that is just land stays land. None of those rows is a percentage of the $10 million invented basis.
Inspection, bonus overlay, and filing
Walk buildings, photograph unit interiors, count appliances, measure paving, and interview the manager about what was replaced after closing. Drawings propose; inspection confirms. CostSeg SI describes document extraction as a proposed Super Intelligence stage. This illustration does not claim that drawings are classified without a person, and it does not claim an operational extraction or RSMeans agent.
Used-property bonus depreciation, if any, is a dated statutory overlay under §168(k) and Notice 2026-11, including related-party and prior-use tests. The study classifies components. The CPA decides the bonus rate and prepares Form 4562. Educational information, not tax advice.
Sources
- 1IRS Publication 5653 — Cost Segregation Audit Techniques Guide (rev. 2-2025)(opens in a new tab)
Written for IRS examiners. The guide states it is not an official pronouncement of law and cannot be cited as authority. It predates the July 2025 law.
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