Does a mixed-use building's retail square footage actually matter to the IRS when you depreciate the whole parcel?
39 years on the residential side, 15 on commercial. I have been sitting with this question for three months because I have a deal I am close to writing an offer on, two retail bays downstairs totaling about 1,100 square feet, four apartments above totaling 3,600 square feet, so roughly 23% commercial by floor area. My tax person says I have to depreciate the whole thing at 39 years because it is a mixed-use commercial structure. A friend who owns a six over two downtown says his CPA cost-segged the residential floors at 27.5 and the ground floor at 39 on the same parcel, same deed, and his depreciation schedule reflects both. That is not a trivial difference. On a $1.2M acquisition with say $900k attributed to structure, the annual depreciation spread between treating all of it at 39 versus splitting it by use is somewhere around $10,400 a year, and over a ten-year hold that is real money sitting in one column or the other. I have pulled three different accountants into this conversation and gotten three different answers, which is not confidence-inspiring. One said the square footage ratio is what drives it, one said it is how the building was originally permitted and classified, and one said cost segregation overrides the classification question entirely. What are people actually doing on their tax returns when the building is majority residential but not entirely?
