Multifamily vs Single-Family Rentals: Tax Differences That Matter

By Tom, CPA · Updated October 27, 2026

Part of: Rental Property Taxes

TL;DR: A duplex and a 50-unit building are both residential rental property depreciated over 27.5 years if 80% or more of rent comes from dwelling units. The real tax differences are scale: cost segregation pays off better on bigger buildings, owner-occupied small multifamily splits personal and rental use, and larger deals use partnerships and commercial loans with their own rules.

Educational only, not tax, legal, or investment advice. Examples are illustrations, not predictions. Rules and limits change; verify current figures and talk to a qualified professional about your situation.

Your tenant pays the mortgage; the IRS pays for the roof, eventually, over 27.5 years. With multifamily, several tenants pay it, which is the whole appeal. Investors debating a single-family house versus a fourplex versus an apartment complex often assume the tax rules change at some unit count. They mostly do not. What changes is how much each rule is worth.

Here are the differences that actually show up on the return, as of October 2026.

CPA Warning Label: Five units does not make a building "commercial" for depreciation. The commercial loan label and the tax label are different things.

Residential vs commercial depreciation

Depreciation class depends on use, not unit count. A building is residential rental property, depreciated over 27.5 years, if 80% or more of its gross rental income comes from dwelling units (IRS Publication 946 and Publication 527). Otherwise it is nonresidential real property depreciated over 39 years. A single-family rental, a duplex and a 200-unit apartment complex are all 27.5-year property. A mixed-use building with street-level retail may fall to 39 years if the commercial rent is more than 20% of total rent.

Lenders call loans on 5+ unit buildings "commercial" loans. That is a financing label. The IRS does not care what the bank calls it.

Hotels and motels where more than half the units are used on a transient basis are not dwelling units for this test, so they are generally 39-year property.

Cost seg payoff

Cost segregation reclassifies parts of a building into 5-, 7- and 15-year property eligible for bonus depreciation, which as of October 2026 is 100% for qualified property acquired after January 19, 2025 (IRS Notice 2026-11). Larger multifamily properties usually have more reclassifiable cost per dollar of purchase price: parking lots, site lighting, landscaping, fencing, clubhouse furnishings, laundry equipment, fitness equipment, and many appliances across many units.

A study has a fixed cost component, so the economics improve with property size. On a $250,000 single-family rental, the study fee may eat a big share of the tax benefit; on a $5 million apartment complex, it may be a rounding error. Some owners of small properties use simpler, cheaper approaches, but the results must still be defensible.

Illustration: Two properties bought in 2026 after the bonus cutoff. Property A: single-family, building basis $240,000, study fee $3,000, reclassifies 15% ($36,000). Property B: 40 units, building basis $6,000,000, study fee $12,000, reclassifies 25% ($1,500,000). Year-one bonus for A: $36,000, so the fee is about 8% of the accelerated amount. For B: $1,500,000, the fee is less than 1%. Both face recapture of the personal property at ordinary rates on a taxable sale.

Grouping

Under the passive activity rules, each rental is generally a separate activity, but taxpayers can group activities that form an appropriate economic unit, and real estate professionals can elect to treat all interests in rental real estate as one activity (Publication 925). A single 40-unit building is one property and one activity. Ten single-family houses are ten properties that may need grouping or the REPS aggregation election to meet material participation efficiently.

Grouping also matters at sale: suspended losses are released when you dispose of your entire interest in the activity. If you grouped ten houses into one activity, selling one house may not free up that house's suspended losses until you dispose of substantially all of the activity. Ungrouped, each sale releases its own losses.

Owner-occupied small multifamily

"House hacking," living in one unit of a duplex to fourplex and renting the rest, creates a split property:

• The rental units are depreciated over 27.5 years and their expenses deducted on Schedule E.
• Shared expenses such as the roof, insurance and property tax are allocated by a reasonable method, usually square footage or number of rooms (Publication 527).
• Your unit's share of mortgage interest and property tax may be deductible as itemized deductions, subject to the SALT and mortgage limits; other expenses for your unit are personal.
• At sale, the Section 121 exclusion can apply to your unit's gain if you meet the ownership and use tests, while gain on the rental units is taxable (Publication 523). For a multi-unit building where you live in one unit, the IRS treats the rental part as separate property, so the allocation matters.

Illustration: A buyer purchases a fourplex for $600,000 ($480,000 building) and lives in one of four equal units. Three quarters of the building, $360,000, is rental basis: about $13,090 of depreciation a year. If property tax is $8,000, $6,000 goes on Schedule E and $2,000 is a potential itemized deduction.

Financing

Interest on rental debt is deductible on Schedule E regardless of loan type. The differences are practical:

• Residential (1-4 unit) loans are typically personal, fixed-rate, and recourse. Commercial loans on 5+ units are often shorter-term, may be nonrecourse, and are underwritten on property income.
• Nonrecourse debt affects at-risk rules: for real estate, qualified nonrecourse financing from a commercial lender counts as at-risk, so losses are not limited by the at-risk rules on that basis (Publication 925).
• Loan costs on any loan (points, origination fees) are generally amortized over the loan term for rentals. A refinance or sale lets you deduct the unamortized balance.
• Larger businesses may face the Section 163(j) business interest limit; real property trades or businesses can elect out, at the cost of using the slower alternative depreciation system for residential rental property (30 years for property placed in service after 2017).

Syndications and partnerships

Most large multifamily is owned through partnerships. Limited partners generally cannot materially participate, so their K-1 losses are passive, and they rely on passive income or a sale to use them. Partnerships can make elections such as bonus depreciation or opting out at the entity level. Partners receive Schedule K-1 and often must file in the state where the property is located. Exchanging out of a partnership is complicated, because a 1031 exchange applies to real property, not partnership interests.

Single-family investors usually own directly or through a single-member LLC (Schedule E), keeping the return simpler and the exit more flexible.

Sale

Sale mechanics are the same: gain equals amount realized minus adjusted basis, with straight-line building depreciation taxed as unrecaptured Section 1250 gain up to 25% and cost seg personal property recaptured at ordinary rates under Section 1245 (IRS Topic 409). Differences:

• Divisibility. Ten houses can be sold one at a time, spreading gain across years. A 40-unit building sells at once.
• Buyer pool. Houses sell to owner-occupants; apartments to investors, which affects 1031 timing.
• Bigger recapture. More cost seg usually means more Section 1245 recapture at ordinary rates.
• Net investment income tax. The 3.8% NIIT applies to gain for owners above $250,000 joint or $200,000 single modified AGI (IRS Topic 559), and a big apartment sale can push almost anyone over in that year.

Which fits which investor

Taxes rarely decide between a house and an apartment building, but they can tilt it. Owners who expect to use losses now (real estate professionals, or STR owners with material participation) tend to benefit more from large buildings with big cost seg results. Owners with high W-2 income and passive losses may prefer properties whose depreciation simply shelters their own rent, and value the flexibility to sell single houses one per year to manage brackets. House hackers get a unique combination: partial Section 121 exclusion, personal deductions and rental depreciation under one roof. Frugal Fran would call that efficient; Lavish Larry would call it living next to his tenants.

Side-by-side