Cost Segregation for Mixed-Use Properties
Mixed-use properties—combining retail, office, residential, or other uses—present unique cost segregation opportunities. Each component of the property may have different depreciation schedules and accelerable percentages. A comprehensive cost segregation study analyzes all uses to maximize overall tax benefits while properly allocating costs between different depreciation classes.
How Cost Segregation Works for Mixed-Use
A cost segregation study for mixed-use properties requires analysis of each use category. Retail and office components use 39-year depreciation while residential uses 27.5-year—and each has different accelerable component profiles.
Engineers analyze the entire property, allocating components to the appropriate use category and identifying acceleration opportunities within each. Common areas are allocated based on square footage or other reasonable methods.
The result is a comprehensive allocation that your accountant uses to maximize deductions across all uses. For existing properties, catch-up adjustments can be applied to each component.
Why Mixed-Use Owners Overpay in Taxes
Mixed-use properties often have the most complex depreciation situations—and the most opportunity for optimization. Without proper analysis, owners may misallocate costs between use categories or miss acceleration opportunities entirely.
Consider a property with retail on the ground floor and apartments above. The retail components use 39-year depreciation while the apartments use 27.5 years. Within each, substantial value can be accelerated to 5, 7, or 15 years.
Many mixed-use owners (and their CPAs) simplify by using a single depreciation approach. This leaves significant tax savings unclaimed and may not comply with IRS requirements for proper allocation.
Property Components Commonly Reclassified
Mixed-use properties require careful analysis of each use category. Overall accelerable percentages vary widely depending on the mix of uses and quality of buildouts.
Timing, Retroactive Studies, and Cash Impact
For new mixed-use construction, conducting a cost segregation study at completion ensures proper allocation from the start. This prevents future complications when selling or refinancing specific components.
For existing mixed-use properties, retroactive studies can generate substantial catch-up deductions. The complexity of these properties often means significant missed optimization opportunities.
Cash impact scales with property complexity: mixed-use properties with multiple uses and high-quality buildouts often yield the largest tax savings. Proper analysis is essential to capturing the full benefit.
Who Qualifies and Who Does Not
Good Candidates
- •Owners of retail/residential mixed-use buildings
- •Office/retail combination properties
- •Live/work and creative space developments
- •Developers completing mixed-use construction
- •Investors acquiring mixed-use assets
- •Properties with cost basis of $2 million or more
May Not Benefit
- •Single-use properties (analyze under appropriate category)
- •Properties with minimal improvement value
- •Owners planning immediate sale
- •Properties with unclear use allocation
Common Mistakes Mixed-Use Owners Make
Using a single depreciation schedule for the entire property
Different uses require different base depreciation periods. Proper allocation is essential for compliance and optimization.
Not allocating common areas appropriately
Lobbies, parking, and shared systems must be allocated between uses. The allocation method affects both depreciation and future sale treatment.
Ignoring the different component profiles of each use
Retail, office, and residential spaces have different accelerable component mixes. Each should be analyzed according to its use type.
Not studying tenant improvements in each use
Tenant buildouts in retail and office spaces create accelerable basis. Each major buildout should be analyzed.
Oversimplifying the analysis
Mixed-use properties require detailed component-by-component analysis. Quick estimates often miss significant value.