Leveraging Specialty Tax Incentives to Fund Affordable Housing

The shortage of affordable housing remains a nationwide crisis. In a sector where every dollar counts, affordable housing developers and investors are turning to real estate tax strategies as a vital financial lever. Cost segregation and/or 179D deductions can unlock the cash flow critical to making affordable housing deals happen.     

What is Cost Segregation? 

Cost segregation is an IRS-approved tax strategy that identifies and reclassifies building components into shorter-life asset categories—typically 5, 7, or 15 years. This is significantly quicker than the traditional 27.5-year depreciation treatment assigned to residential real estate. By front-loading depreciation expenses in this way, taxpayers can benefit from significant tax deferral and increased cash flow. 

It’s important to understand that cost segregation doesn’t increase the total amount of depreciation—it just accelerates it. In Affordable Housing, where thin margins and tight funding cycles are the norm, the time value of money becomes especially impactful. 

Bonus depreciation is an additional incentive in play in addition to accelerated depreciation. Bonus depreciation permits the immediate write-off of a percentage of an eligible asset’s cost in the year it was placed in service.    

Affordable Housing in the Context of the Current Tax Law 

As real estate owners eagerly await news on the potential return of 100% bonus depreciation, let’s review the current landscape under the TCJA:  

• 10 Years of Fixed Bonus Rates Facilitated Deal Structuring  
  • Allowed investors to rely on predictable information and confidently model or underwrite deals, knowing the resulting yield will be fixed as expected.   
  • In the past, bonus was renewed piecemeal, a year or two at a time. This made it hard to plan—legislation could expire after a deal was modeled but before the property was placed in service, resulting in fluctuating yields and frustrated investors.   
  • The 10 years of fixed rates are coming to a close, with the bonus scheduled to phase out on 12/31/2026. Congressional action is anticipated, but as of this writing, investors can still rely on a 40% bonus for properties placed in service in 2025 and a 20% bonus for properties placed in service in 2026.   
• Leveraging Bonus on Acquired Properties Boosts Yield Exponentially 
  • This was a boon to investors in every vertical, and Affordable Housing was no exception.  The tax savings opportunities for acquired properties skyrocketed instantly.  

Cost Segregation in New Build Affordable Housing  

Cost segregation may be performed on all types of Affordable Housing properties – workforce housing, senior housing, veterans’ housing, etc.  Consider the following examples of newly constructed properties:  

Veterans’ Housing  

This facility supports veterans' transition to civilian life, offering counseling, vocational training, and dignified housing.  

• Placed-in-Service: 2023 
• Depreciable Basis: $24.3M 
• Accelerated Assets: 12.1% to 5-year, 7.9% to 15-year 
• First-Year Tax Savings: $1.03M 

Garden-Style Apartment Complex 

This large property provides family-friendly amenities including a splash pad, tetherball court, and picnic area.  

• Placed-in-Service: 2024 
• Depreciable Basis: $47.7M 
• Accelerated Assets: 15.0% to 5-year, 9.4% to 15-year 
• First-Year Tax Savings: $2.47M 

Beyond New Construction: Acquisition and Rehab Opportunities 

Cost segregation is also highly effective in acquisition and renovation scenarios. By treating acquisition and rehab separately, engineers can tailor studies to meet investor targets and maximize benefit. 

Garden-Style Complex: Acquisition/Rehab 

This single-building property was acquired in March 2022, and renovations were placed in service six months later. The rehab included upgrades to the building façade, HVAC improvements, and new kitchen and interior finishes.  

• Depreciable Basis: $8.6M 
• Accelerated Assets: 28.9% to 5-year, 6.3% to 15-year 
• First-Year Tax Savings: $1.04M 

Senior Center: Acquisition/Rehab   

Both phases were placed in service in June 2023. In addition to new windows, siding, glass doors, and dishwashers, several units were upgraded to be fully ADA compliant.   

• Basis: $25M 
• Accelerated Assets: 17.0% to 5-year, 17.6% to 15-year 
• First-Year Tax Savings: $2.42M 

Cost Segregation and 179D: A Powerful Combination for Deals 

When cost segregation is paired with the 179D Deduction, the results are even more powerful. 179D incentives energy-efficient construction of new and retrofitted residential rental properties four or more stories high.  The deduction can reach up to $5.00/SF, adjusted for inflation, boosting tax savings while enhancing property sustainability.   

The Bottom Line 

Specialty tax strategies can make Affordable Housing deals happen. Investors can strengthen their models and enhance IRR by accelerating depreciation and optimizing deductions. If you’re looking to move your Affordable Housing project forward, EisnerAmper can help you navigate funding and incentives in this complex space.