A duplex, triplex, or fourplex reclassifies more of its cost basis than a single-family rental of the same value, and the reason is simple arithmetic. Cost segregation (a study that reclassifies parts of a property so you can depreciate them faster) finds its value in components: appliances, flooring, cabinetry, water heaters, HVAC, and site improvements. A fourplex has four of most of those. A single-family rental has one.
This guide covers why small multifamily is a stronger candidate than most owners expect, the unit-count rule that trips up a lot of people, what actually gets reclassified, and what the first-year math looks like on a real fourplex.
Unit count does not decide your depreciation schedule
This is the single most common misunderstanding about multifamily, and it costs owners real money.
Lenders call five-or-more units "commercial." That is a financing term. It has nothing to do with how the IRS depreciates the building. Under Section 168(e)(2)(A), a building is residential rental property, depreciated over 27.5 years, when 80% or more of its gross rental income comes from dwelling units. A 4-unit building qualifies. So does a 40-unit apartment building. So does a 200-unit complex.
What breaks the 80% test is income mix, not door count. A building with ground-floor retail can tip over the line if the commercial rent is large enough, and then the whole building depreciates over 39 years instead of 27.5. Transient occupancy matters too: if the average stay runs seven days or less, the units are not "dwelling units" for this test, which is the mechanism behind the short-term rental treatment.
The practical takeaway: if you own a small apartment building with no commercial tenants, your building is on the 27.5-year residential schedule, and the same component analysis that works on a single-family rental works on yours, at several times the scale.
Why the per-unit multiplication matters so much
Residential studies most commonly move 20% to 40% of the building basis (the purchase price you are allowed to depreciate, excluding land) into 5, 7, and 15-year property. On a single-family rental, the short-life components are real but there is one of each, so it tends to sit in the lower part of that range.
A fourplex has four kitchens. Four refrigerators, four ranges, four dishwashers, four sets of cabinetry and countertops, four sets of flooring, four water heaters, and often four separate HVAC systems. Every one of those is 5-year property. The 27.5-year structural shell (foundation, framing, roof, exterior walls, windows) does not multiply the same way, because the four units share it.
That asymmetry is the whole story. The short-life side of the ledger scales with unit count. The long-life side scales with square footage. On small multifamily we see the upper end of the residential range, commonly 30% to 40% of the building basis, and higher still on properties that have been renovated recently or carry significant site work.
What gets reclassified on small multifamily
5-year property
- Appliances in every unit. Refrigerators, ranges, ovens, dishwashers, microwaves, in-unit washers and dryers, and range hoods.
- Cabinetry and countertops. Kitchen and bathroom cabinetry that is not part of the structural walls, plus countertops and backsplashes.
- Carpet and removable flooring. Carpet, vinyl plank, and other floor coverings that are not permanently affixed. Ceramic tile set in mortar generally stays with the building.
- Decorative lighting and fixtures. Fixtures that serve a decorative purpose rather than general building illumination.
- Window treatments. Blinds, shades, and curtain hardware.
- Laundry room equipment. Shared washers, dryers, and any coin or card systems.
- Dedicated electrical and plumbing. Wiring and rough plumbing that serves specific equipment rather than the building generally. This is a documentation-heavy category and a common source of thin work in cheap studies.
15-year land improvements
- Parking areas. Asphalt or concrete lots, striping, wheel stops, and carports. Small multifamily almost always has dedicated tenant parking, and single-family rentals often do not.
- Sidewalks and walkways. Including any concrete stairs and landings outside the building envelope.
- Site lighting. Pole lights, walkway lighting, and building-mounted exterior lighting on separate circuits.
- Fencing and gates. Perimeter fencing, dumpster enclosures, and privacy screening between units.
- Landscaping and irrigation. Trees, shrubs, turf, and sprinkler systems.
- Site drainage. Storm drains, catch basins, and grading work.
- Mailbox kiosks and signage. Small individually, and they add up across a portfolio.
27.5-year property
- Foundation, framing, roof, exterior walls, and windows
- Interior structural walls, subfloor, and ceilings
- Central plumbing and electrical serving the building generally
- Elevators and stairwells
What the math looks like on a fourplex
Take a fourplex bought for $850,000. Assume $170,000 of that is land, which is not depreciable, leaving $680,000 of building basis. A study that reclassifies 35% moves roughly $238,000 into 5, 7, and 15-year property.
With 100% bonus depreciation, that $238,000 is deductible in year one instead of being spread across 27.5 years. For an owner in the 32% bracket, that is roughly $76,000 of tax deferred into year one, against a study fee in the hundreds of dollars.
Compare that to a $850,000 single-family rental on the same street. Same purchase price, same land value, but with one kitchen instead of four and no shared parking, a study on that property more often lands in the lower part of the range. At 22% that is about $150,000. The fourplex carries well over half again the year-one deduction on an identical price tag.
These are illustrative figures. Your actual reclassification depends on the property's age, condition, renovation history, site work, and how the purchase price allocates between land and building. Run the free instant estimate to see the numbers on your specific property.
Five or more units
Everything above still applies. The depreciation schedule does not change at five units, and the component categories are the same. What changes is scale and documentation: more units means more square footage to walk, more variation between units, and usually more site work.
Larger apartment properties also tend to have items that rarely appear on a fourplex, including dedicated laundry buildings, leasing offices, pools and pool equipment, fitness rooms, and separately metered utility infrastructure. Those are worth real money in a study and they need to be documented individually rather than estimated.
We scope properties above four units individually rather than running them through the standard flat-fee residential process. Request a scope review and we will confirm fee and timing before any work starts.
Renovations and partial dispositions
Multifamily owners renovate unit by unit, often over several years, and that creates an opportunity most owners miss.
When you replace a component that is still on the books, such as gutting a kitchen and replacing cabinetry that was part of your original basis, you can generally write off the remaining basis of what you removed. That is a partial disposition election, and it requires knowing what the removed component was worth. A cost segregation study establishes those component values. Without one, there is nothing to dispose of, and you end up depreciating a kitchen that no longer exists alongside the new one.
If you are planning a unit-by-unit renovation program, the study is worth more if it happens before the work, not after.
When multifamily cost segregation makes sense
- You have taxable income to offset. The deduction is only worth what it shelters. Passive activity rules limit what rental losses can offset for most owners, so this is a conversation to have with your CPA before you order.
- You are placing the property in service this year. The cleanest case. The study lands with the first return that includes the property.
- You have owned it for years without a study. A look-back study gives your CPA the component detail needed to claim the missed depreciation as a catch-up on a current return, generally without amending prior years. Your CPA determines the filing mechanics.
- You are renovating unit by unit. See partial dispositions above.
- You plan to hold. Depreciation recapture reduces the net benefit on short holds. Our recapture guide walks through when it matters and when it does not.
Bottom line
Small multifamily is one of the best-fitting property types for cost segregation, because the components that reclassify multiply with unit count while the structural shell does not. Residential studies most commonly move 20% to 40% of building basis into short-life property, with small multifamily at the upper end, and unit count does not change the 27.5-year residential schedule as long as the building's income is coming from dwelling units.
To see what your building looks like, start with the free cost segregation calculator, or read more on the multifamily cost segregation page. When you are ready, submit your property and have a complete report in 2 business days.