Property owners can leverage tax incentives to maximize yield on their real estate. That’s well-established. What’s not as commonly understood is the fact that those very incentives can also bring benefits to property brokers and designers, including architects and engineers. When applied appropriately through cost segregation, the same incentive can be a win for multiple parties.
Cost Segregation is a forensic, engineering-based analysis of a building’s components. Without a cost segregation study, most components of a multifamily property are depreciated over the IRS-prescribed 27.5-year recovery period for residential rental property.
However, the IRS has established shorter-lived categories for building components that won’t last nearly that long. A five-year lifespan is designated for items such as carpet, wallpaper, window treatments, counters, cabinets, decorative lighting and moldings.
Features such as landscaping, parking lots, sidewalks and pools are estimated to last for about 15 years.
In a cost segregation study, an engineer will identify, quantify and assign costs to each property asset. The assets that qualify for shorter-lived tax treatment will be moved into those categories, where they will depreciate over five or 15 years.
The more of a property’s depreciable basis that can be reclassified into shorter-lived components, the greater the potential benefit. In multifamily properties, engineers generally reclassify 10 to 30 percent of the depreciable basis into shorter recovery periods, translating into $75,000 to $300,000 in federal tax benefits for every $1 million of basis.
The process doesn’t create new deductions. It shifts them toward the earlier years of ownership. This results in tax deferral and increased cash flow.
Take a look at a real-life example of a mid-rise property with 83 units:
- Depreciable basis: $7.25 million
- Placed in service December 2025
- 12.1 percent moved to five-year, 8.1 percent moved to 15-year
- First-year basis that was reclassified: $1.46 million
Where Do Brokers Fit In?
It’s obvious that cost segregation benefits property owners and investors. But what does it mean for brokers?
Brokers do benefit from cost segregation — and 179D deductions, as we’ll discuss — but in a more indirect way. Brokers:
Help Move Deals Forward. Improved after-tax cash flow can make an investment more attractive. For clients weighing a potential acquisition, projected tax savings may help tip the scales.
Stand Out as a Trusted Advisor. Bringing potential tax-saving opportunities to your clients’ attention demonstrates that you’re looking beyond the transaction to their long-term financial success.
Reconnect with Past Clients. Cost segregation isn’t just for new acquisitions. Owners of properties purchased years ago may still qualify for significant benefits. That’s a great reason to pick up the phone and reconnect.
You don’t need to be a tax expert. Sometimes just asking, “Have you considered cost segregation?” is enough to get the ball rolling.
179D Deduction
The 179D deduction rewards property owners for making energy-efficient upgrades, offering up to $5.94 per square foot for qualifying improvements to lighting, HVAC and the building envelope in the 2026 tax year. This benefit is inflation-adjusted.
A few important points about the deduction: It is available for new construction projects or energy retrofits that are at least four stories above ground. Energy analysis, inspection and certification by a qualified third party is required
Under the recent tax law, the deduction can only be claimed on properties that were under construction by June 30, 2026. The deduction may still be claimed on projects already completed and those currently under construction, as long as the developer broke ground before June 30, 2026.
Deduction value depends on the level of energy efficiency achieved and the satisfaction of prevailing wage and apprenticeship requirements. Because the benefit is calculated per square foot, it grows with the size of your multifamily property.
Where Do Designers Fit In?
Again, it’s clear how multifamily owners and investors can gain from the 179D deduction. And brokers can benefit simply by suggesting the incentive to clients who might be eligible.
But there’s a special opportunity for architects and engineers here, too. Government and tax-exempt entities cannot claim the 179D deduction themselves, but they can allocate it to qualifying designers of eligible energy-efficient properties.
Yes, designers, you may receive a tax deduction associated with a property that you do not own.
Designers of the following multifamily-adjacent property types may be able to benefit from 179D deduction via allocation:
- University dorms
- Government housing
- Military barracks
- Homeless shelters
- Low-income housing
Remember, the property must be owned by the government or a tax-exempt entity and must be at least four stories above ground.
There may be more than one eligible designer on a given project, and the allocation may be split among multiple parties.
There’s One More Incentive — Just for the Designers
Sorry, owners, developers and brokers. This one is just for the architects, engineers and design-build contractors among us.
The federal research and development (R&D) tax credit is a general business tax credit designed to boost domestic innovation. For architecture, engineering and contracting firms, this usually takes the form of design and solving technical problems through a process of experimentation.
The R&D tax credit provides a dollar-for-dollar reduction in tax liability, directly improving cash flow. Plus, it grows with you. The more you spend on research, the larger your credit can become. You can recoup up to 10 cents of every dollar spent on a qualified activity, including money spent on wages. If your firm’s qualifying payroll is $500,000, you might claim an annual credit of up to $50,000.
The right specialty tax conversation can have a positive impact on multiple parties. And because brokers, lenders and design professionals may encounter the opportunity long be-fore a tax professional ever enters the picture, it pays to keep your eyes open to potential savings.
Sean Lichterman is regional director of Dresher, Pennsylvania-based Capstan Tax Strategies. He can be reached at [email protected] or 224-814-3174.