Topic 07 · 6 min read
Multifamily and Commercial Property
Bigger buildings, different math.
Five units and up is commercial territory, and so are offices, retail, and warehouses. Value is driven by the income the property produces rather than by what the neighbors sold for, and the tax details shift with it.
What to know
- Value follows income
- Net operating income divided by the market capitalization rate sets the price, so raising rent or trimming expenses raises value directly.
- Depreciation lives differ
- Residential rental, including apartment buildings, uses 27.5 years; offices, retail, and industrial use 39 years.
- Cost segregation pays more here
- Larger buildings have more short-life components, so the study fee is a smaller share of the benefit.
- Tenant improvements
- Money spent fitting out a commercial space for a tenant has its own depreciation treatment and sometimes qualifies for faster write-off.
- Net leases
- In a triple-net lease the tenant pays taxes, insurance, and maintenance, which simplifies operations but can complicate the QBI deduction.
The tax benefit
Large depreciation deductions against substantial rental income, with more components eligible for acceleration.
Worked example
Forcing appreciation
Raising net operating income by $30,000 at a 6% capitalization rate adds roughly $500,000 of value — and the depreciation schedule keeps sheltering the income that did it.
Watch out for
- Commercial vacancies last far longer than residential ones.
- Loans are usually shorter with balloon payments, so refinancing risk is real.
- Local property tax reassessment after purchase can erase projected returns.
Terms from this topic
Net operating incomeCapitalization rateTriple-net leaseTenant improvement
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