Owning or investing in multifamily real estate can be highly tax-efficient—but only if you avoid a handful of common mistakes. From skipping cost-segregation studies to choosing the wrong entity or missing a 1031 exchange window, small missteps can reduce cash flow and erode long-term returns. Below are the top five tax mistakes in multifamily real estate we see most often, with practical ways to avoid them and keep more of your capital working in your properties.
1. Skipping a Cost-Segregation Study on Multifamily Properties
For multifamily real estate, component assets (unit finishes, site work, common-area improvements) are often excellent candidates for accelerated depreciation. Cost segregation studies are strategic tools used to enhance depreciation deductions and reduce tax liability for both residential and commercial rental properties—whether currently owned or under consideration for acquisition. These studies involve a detailed analysis of a property’s components, allowing certain elements—such as flooring, windows, fencing, and sidewalks—to be reclassified for accelerated depreciation. As a result, these items can be depreciated over much shorter periods than the standard 27.5- or 39-year schedules, leading to significant tax savings. Most taxpayers can realize significant advantages by reclassifying components of their property into shorter-lived assets as identified through a cost segregation study. Nevertheless, many real estate owners and investors fail to conduct these studies and thus lose out on opportunities for major tax depreciation deductions.
2. Overlooking Bonus Depreciation on Renovations and Unit Turns
Capitalized improvements in multifamily assets—appliance packages, flooring, landscaping, parking lots—may qualify for bonus depreciation and immediate deductions. For real estate investors and owners aiming to enhance their tax strategy, bonus depreciation offers a valuable opportunity. This tax provision enables accelerated depreciation on qualifying assets, helping to lower taxable income and boost cash flow. Whether acquiring new rental properties or improving existing ones, understanding and leveraging bonus depreciation can significantly increase your financial returns in today’s real estate market. Taking advantage of bonus depreciation offers several key benefits for real estate investors. It provides immediate tax savings by allowing a substantial portion of property costs to be deducted in the first year, which can significantly reduce taxable income and overall tax liability. This acceleration of deductions also enables investors to realize faster returns, generating profits sooner and freeing up resources to reinvest in expanding their portfolios. Additionally, bonus depreciation offers valuable flexibility in managing taxes and cash flow, especially for those with fluctuating income or large capital expenditures. Another important advantage is the potential to create or increase net operating losses (NOLs) or passive loss carryovers when claiming bonus depreciation during loss years, allowing investors to carry those losses forward to offset future taxable income.
3. Using the Wrong Entity Structure for Multifamily Investments
The right structure (often an LLC taxed as a partnership) should reflect debt usage, investor profiles, promote/waterfall terms, and your exit strategy. Choosing the right business entity cannot be done in isolation. A comprehensive entity strategy must consider multiple factors, including the nature of the activity, cash flow availability, use of leveraged debt, legal implications, exit strategies, as well as retirement and estate planning. When planning your real estate venture or property management company, it’s important to consider the entire life cycle with the end goal in mind. The decisions you make today can significantly affect the tax implications of your investment, especially regarding your exit strategy.
4. Missing the Benefits of a 1031 Exchange During Repositioning
Many apartment owners sell after value-add projects; planning early preserves 1031 timing, identifies like-kind targets, and keeps equity untaxed and compounding. Many real estate investors are always looking for strategies to boost their returns and optimize their portfolios. One of the most effective methods is the 1031 exchange—a provision in the U.S. tax code that enables investors to defer capital gains taxes by reinvesting proceeds into like-kind properties. A 1031 exchange allows real estate investors to defer capital gains taxes by reinvesting sale proceeds into like-kind properties, preserving more capital for growth. This deferral increases purchasing power, enabling investors to acquire higher-value properties and expand their portfolios more aggressively. It also boosts leverage by freeing up cash for larger down payments and can improve cash flow by swapping low-yield properties for higher-income ones. Additionally, 1031 exchanges offer flexibility to consolidate or diversify investments and reduce management burdens by exchanging high-maintenance properties for easier ones. They also play a valuable role in estate planning by deferring taxes across transactions and allowing heirs to inherit properties with a stepped-up tax basis, minimizing tax liabilities.
5. Not Hiring a CPA Firm That Specializes in Multifamily Real Estate
A real-estate-focused CPA helps align depreciation, passive-activity rules, and exit planning with your investment thesis—and defends positions if questioned. Hiring a CPA who specializes in real estate tax is crucial for property owners and investors because real estate taxation involves complex rules, deductions, and strategies that directly impact profitability. A specialized CPA understands the nuances of tax laws related to depreciation, 1031 exchanges, passive activity rules, and capital gains, enabling them to identify opportunities for significant tax savings and compliance. Their expertise helps investors navigate intricate transactions, optimize tax benefits, and avoid costly mistakes or audits, ultimately protecting and enhancing the financial performance of real estate investments. Having a specialized CPA also helps in addressing complex tax questions from investors and other parties. The team at Singh and Associates, LLP has specialized in real estate tax issues since its inception in 1990. We have helped real estate companies of all sizes grow and expand their portfolio. In addition, we have extensive experience helping individual real estate investors maximize their tax benefits. Please reach out to us if you have any questions.
Navigating the tax rules around multifamily real estate doesn’t have to be overwhelming. Singh & Associates, LLP has advised real estate owners, operators, and syndicators since 1990—modeling bonus depreciation, coordinating cost-segregation studies, structuring entities, and planning seamless 1031 exchanges. If you’re acquiring, renovating, or repositioning an apartment asset, our team can help you build a forward-looking tax plan that protects cash flow and minimizes risk. Contact us to discuss your situation.
