Mixed-Use Buildings
A building with apartments over retail can be residential rental, nonresidential, or more than one building for tax purposes. The 80% dwelling-unit test in §168(e)(2) is the starting point. Getting 27.5 versus 39 wrong dominates any later component study.
Educational information, not tax advice.
Updated 2026-10-14
Key takeaways
- Residential rental status is an 80% gross-rental-income test at the building or structure level.
- If commercial rent exceeds 20% of that building’s gross rental income, the whole building is generally 39-year nonresidential real property.
- Separate buildings on one parcel can have different recovery periods.
- The residential and retail matrices can both be relevant on one site after the building class is set.
- QIP applies only to interiors of nonresidential buildings. It does not apply to a building that is residential rental property.
- Bonus depreciation as of 2026 can apply to qualified components acquired after January 19, 2025, not to a 27.5- or 39-year shell.
Mixed-use is a zoning word. For MACRS, the question is whether a building or structure is residential rental property under §168(e)(2). A building is residential rental property if 80% or more of its gross rental income for the year is from dwelling units. A dwelling unit is a house or apartment used to provide living accommodations, excluding units in a hotel, motel, or similar establishment where more than half the units are used on a transient basis. If the taxpayer occupies part of the building, the rental value of that portion is included in gross rental income.
If the test is met, the building is 27.5-year property. If it is not, the building is generally 39-year nonresidential real property. Commercial rent above 20% of gross rental income makes the whole building nonresidential. That is why a single podium with ground-floor retail and apartments above is often the entire case. Publication 527 restates the same test.
Sometimes the engineering and tax answer is that there are two buildings — a retail wing and a residential tower, or a podium and a tower that are separate structures. That is a facts analysis, not a slogan. Treas. Reg. §1.48-1(e)(1) defines a building as a structure enclosing space. Separate structures can have separate classes even on one deed.
After building class is set, retail fixtures follow the retail matrix, apartment appliances follow Chapter 7.H, and shared site work is usually class 00.3. A stand-alone clubhouse is 39-year property in Chapter 7.H even when the dwellings are 27.5-year. Attached residential parking follows the dwellings in that matrix; a stand-alone garage is 39-year under Chapter 8.B.
AmeriSouth is the caution case for the apartment side: most contested millwork and “special” systems stayed with the 27.5-year buildings on those facts. It does not classify the retail floor. Peco Foods is the caution on the acquisition side if a written allocation covers the whole mixed-use project.
This page is educational information, not tax advice. Proposed Super Intelligence mixed-use splits are explanatory only. Confirm the 80% test with a CPA (flag F-07).
Running the 80% test
Use a rent roll that separates dwelling rent from commercial rent for each building or structure. Include owner-occupied rental value. Do not use unit count or square footage as a substitute for the income test the statute requires, unless a CPA applies another authorized method. Publication 527 restates the same dwelling-unit definition and is the plain-language companion to section 168(e)(2).
Hotels, student housing, and senior living on a mixed site each have extra transient-use or service-fee questions described on those pages. This page does not conclude those uses are residential or nonresidential.
Components after class is set
If the building is residential rental property, QIP is unavailable for later interiors. If it is nonresidential, later interior work the taxpayer makes may be QIP. That single switch is why class comes first.
Shared lobby finishes, elevators, and sprinklers are structural components of whichever building they serve. Allocating an elevator between apartments and retail does not change its character as a structural component under Treas. Reg. §1.48-1(e)(2).
Documentation
Architectural drawings that show expansion joints and separate structures, commercial and residential rent rolls, and a land-first purchase allocation are the core file. Photographs of the retail floor versus apartment corridors prevent applying the wrong matrix.
New mixed-use projects can use actual cost records. The ATG detailed-engineering approach is the preferred method when those records exist. Do not apply a single community-wide percentage to dwellings and retail together.
Bonus depreciation as of 2026
Qualified property acquired after January 19, 2025 is eligible for 100% bonus depreciation under Notice 2026-11. Neither a 27.5-year nor a 39-year building is qualified property. Apartment appliances, retail fixtures, 15-year site work, and QIP (nonresidential only) can be. Binding contracts on or before January 19, 2025 stay on the phase-down.
Educational information, not tax advice. Confirm mixed-use income and elections with a CPA.
Limits
Do not invent a typical mixed-use reclass percentage. Do not assume a recorded condominium regime automatically splits the tax buildings; ownership and structure still have to be examined.
Chapter 7.H expressly allows examiners to use the restaurant matrix for restaurant assets inside an apartment building. That cross-reference is about kitchen equipment, not about converting the tower to 39-year property.
Sources
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- 3IRS Publication 5653 — Cost Segregation Audit Techniques Guide (rev. 2-2025)(opens in a new tab)
Written for IRS examiners. The guide states it is not an official pronouncement of law and cannot be cited as authority. It predates the July 2025 law.
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