When Your Investment Property Includes a Pet Salon: Allocating Income and Expenses Between Units

When Your Investment Property Includes a Pet Salon: Cut Through the Confusion

Mixed‑use properties that pair residential units with a commercial pet salon create attractive returns — and complicated tax questions. Investors worry: How do I split income and expenses between units? Does the salon’s equipment get faster depreciation? Who collects sales tax on grooming? In 2026, with continued growth in the pet services market and heightened IRS focus on mixed‑use apportionments, you need a clear, defensible approach now.

The One West Point Example: Why this matters

The One West Point development in London (iconic for adding on‑site pet amenities like an indoor dog park and salon) is a useful real‑world model. Imagine the U.S. equivalent: a luxury tower where the owner controls a ground‑floor pet salon and leases the upper floors as residential apartments. That single building creates three distinct tax and accounting threads: residential rental income, commercial operating income (if the owner runs the salon), and tenant rent if the salon is operated by a third party. Each thread drives allocation, depreciation, sales tax, and apportionment decisions that materially affect cash flow and audit risk.

Key principles you must apply first

• Separate economic activities: Treat the residential and salon activities as distinct for both income reporting and expense allocation.
• Document allocation methodology: Square footage, usage, and revenue shares are acceptable methods — pick one, apply consistently, and keep the backup.
• Apply appropriate depreciation lives: Residential rental structures, nonresidential commercial building components, and personal property (salon equipment) use different recovery periods under the tax code.
• Account for sales tax and payroll separately: Salon services and retail sales often trigger state sales taxes and employer payroll obligations.

2026 Trends that change the calculus

Recent market and regulatory trends that matter to mixed‑use investors:

• Pet services remain a growth engine. Demand for grooming and wellness services continued rising through late 2025, making salon rents and percentage rent clauses more valuable.
• Cost pressures and capex planning: Higher construction and renovation costs in 2024–2025 make targeted construction and renovation costs more valuable to model — and make targeted cost segregation studies more valuable to accelerate depreciation where allowed.
• Increased IRS scrutiny: Tax professionals report more examinations focused on mixed‑use apportionments — documented allocation methods are now a first line of defense.
• Sales tax expansion at state level: Several states broadened taxability of personal services in 2024–2025; through early 2026 many landlords and operators reassess collection obligations for grooming and retail sales and retail pet goods.

Step‑by‑step allocation framework

Below is a practical, defensible flow you can apply to the One West Point style property. Use this as a checklist to create your allocation policy.

1) Identify legal and operational roles

Decide whether you (the owner) operate the salon or lease the space to a third‑party business. The accounting and tax treatment differs:

• If a tenant runs the salon: Owner reports rent (base + CAM + percentage rent if applicable). Tenant reports salon gross receipts, collects sales tax (if applicable), claims business expenses and equipment depreciation.
• If owner operates the salon: Owner reports salon operating income as a trade or business, collects sales tax on taxable services, pays payroll taxes, and claims depreciation on salon equipment and allocated building basis for the commercial portion.

2) Choose an allocation method (and document it)

Common, acceptable methods:

• Square footage / floor area: Simple and commonly accepted — allocate building basis and shared expenses by proportion of gross leasable area dedicated to each use.
• Revenue or income share: Allocate shared expenses according to relative income produced by each unit (useful when commercial yields substantially different returns per sq ft).
• Usage or time allocation: For expenses driven by intensity of use (utilities for the salon vs residential), meter or estimate usage and allocate.

Tip: Combine methods when appropriate. For example, allocate structural depreciation by square footage and utilities by metered usage.

3) Allocate purchase / basis and depreciation

Depreciation differences are among the largest ongoing tax effects in a mixed‑use building:

• Residential rental property: Use the residential rental life — generally 27.5 years (straight‑line) in the United States.
• Nonresidential commercial real property: Use nonresidential real property life — generally 39 years (straight‑line).
• Personal property and leasehold improvements: Salon equipment, furniture, and specialized build‑outs often qualify as 5‑ or 7‑year personal property and may qualify for accelerated depreciation or Section 179 expensing (subject to limits and eligibility).

Numeric example: Apportioning basis and depreciation

Use this worked example to show how allocations play out in dollars. Adjust to your actual numbers.

Facts:

• Purchase price (building + improvements) = $5,000,000
• Land value = $1,000,000
• Depreciable basis = $4,000,000 (purchase price minus land)
• Total building area = 100,000 sq ft
• Salon area = 1,500 sq ft
• Residential units = 84,500 sq ft
• Common areas = 14,000 sq ft

Step A — allocate direct space:

• Salon direct basis = (1,500 / 100,000) * $4,000,000 = $60,000
• Residential direct basis = (84,500 / 100,000) * $4,000,000 = $3,380,000
• Common area basis = (14,000 / 100,000) * $4,000,000 = $560,000

Step B — apportion common area based on reasonable usage. Suppose common spaces are used 90% by residents and 10% by salon patrons:

• Common allocated to residential = 90% * $560,000 = $504,000
• Common allocated to salon (commercial) = 10% * $560,000 = $56,000

Totals:

• Commercial (salon) depreciable basis = $60,000 + $56,000 = $116,000
• Residential depreciable basis = $3,884,000 + $504,000 = $3,884,000

Apply depreciation lives:

• Salon (commercial building portion): $116,000 / 39 yrs = approximately $2,974 annual depreciation
• Residential: $3,884,000 / 27.5 yrs = approximately $141,236 annual depreciation

Additionally, assume salon equipment (clippers, table, dryer) cost $50,000 and qualifies as 5‑year personal property. In 2026 bonus depreciation is phased to 20% — so immediate write‑off is limited, and the remainder depreciates over the recovery period. That treatment materially changes front‑end tax deductions versus earlier years when 100% bonus was available.

4) Allocate ongoing expenses and interest

Common examples and recommended allocation approaches:

• Property taxes: Apportion by your same square footage and usage allocation — consistent with your basis allocation. Some local assessors value commercial and residential portions separately; use assessor splits when available.
• Mortgage interest: If one loan financed the entire property, allocate interest based on the same basis percentages used for depreciation. Keep documents that tie loan proceeds to acquisition.
• Insurance: Split by usage and risk. The salon may have a higher per‑sq‑ft liability exposure; consider allocating a higher share to commercial use rather than strict area share.
• Utilities: Submeter when possible. If metering is not feasible, allocate by usage estimates (time of day, hours open, foot traffic) or by square footage weighted by use intensity. Also consider installing submeters with proven devices rather than guessing allocations.
• Maintenance and repairs: Charge directly where possible. For shared services (e.g., elevator maintenance) allocate by square footage or by building function benefit.
• CAM (Common Area Maintenance): If tenants pay CAM, include the salon in the CAM pool according to lease terms. If owner operates the salon, it should pay a fair share of CAM to avoid cross‑subsidy distortions.

5) Sales tax — the slippery, state‑by‑state issue

In many U.S. states, grooming and other pet services are taxable — in others they are not. Late 2024–2025 saw a wave of state reviews expanding tax treatment of services; in 2026 many states continue to refine rules. Practical steps:

• If the salon is tenant‑operated: specify in the lease who is responsible for sales tax compliance. Usually the tenant collects and remits sales tax on retail sales and taxable services.
• If owner operates the salon: register for state sales tax permits in every state with nexus, collect and remit sales tax, and maintain detailed sales records. Online booking platforms and online booking platforms and retail sales can create nexus in new jurisdictions — review marketplace facilitator rules.
• For cross‑border examples like One West Point: UK VAT/GST rules differ — if you own international assets, get local counsel on VAT vs sales tax treatment.

6) Lease design to reduce ambiguity and audit risk

Well‑drafted leases make downstream tax accounting straightforward. Include:

• Clear use clause (e.g., "pet grooming and retail of pet supplies").
• Allocation of CAM, utilities, insurance, property taxes, and repair responsibilities.
• Who pays for and owns tenant improvements (TI) and how TIs will be depreciated or amortized.
• Audit cooperation clause requiring tenant to provide records if required by owner’s accountant or auditor. Consider coupling your lease language with electronic signature workflows and e‑signature policies to keep lease execution auditable (e‑signature best practices).
• Sales tax indemnity language assigning responsibility for sales tax liabilities to the operator.

Advanced strategies to legally accelerate tax benefits

When properly documented, these strategies can improve near‑term cash flow and long‑term tax efficiency:

• Cost segregation study: A third‑party engineer separates building components into shorter‑life assets (e.g., specialized salon plumbing, built‑in cabinetry). This can convert portions of the building basis into 5‑ or 7‑year property, increasing near‑term deductions.
• Section 179 / bonus depreciation planning: For salon equipment purchased in 2026, bonus depreciation is limited to 20% (phased down per current law). Section 179 may provide immediate expensing for qualifying property, subject to caps and income tests. Coordinate purchases across tax years to maximize benefit.
• Consider a separate legal entity: Place the salon in an LLC or single‑purpose entity under a triple net lease to the landlord. This clarifies income streams and places operating risk and payroll obligations with the operator.
• Use percentage rent carefully: A percentage rent clause (e.g., X% of gross salon receipts above a threshold) aligns landlord returns with salon performance but can complicate sales tax and reporting obligations — consider how dynamic rental pricing frameworks affect your lease economics.

Audit red flags and how to avoid them

The IRS and state authorities look for inconsistencies that imply tax avoidance. Common red flags:

• Allocating an outsized share of building basis to residential to get 27.5‑year depreciation when the commercial portion economically dominates.
• Mixing bank accounts and failing to separate salon receipts from rental income.
• Missing sales tax compliance when the operator is not remitting on taxable services.
• Poor or missing documentation: no floor plans, inconsistent rent rolls, or unsupported common area allocations.

Document everything. Floor plans, leases, rent rolls, invoices, and cost segregation reports are your strongest defense.

Practical checklist investors should follow

1. Create and sign distinct leases for the salon and residential units.
2. Decide who operates the salon and document responsibility for sales tax and payroll — consider engaging state sales tax counsel when rules are unclear.
3. Perform a floor plan and square footage measurement and keep it with closing documents.
4. Allocate purchase basis and depreciable amounts at acquisition; consider an appraisal and cost segregation study early.
5. Install submeters where reasonable to fairly allocate utilities.
6. Maintain separate bank accounts for rental income, salon operating receipts, and owner’s operating funds.
7. Review state sales tax rules for services annually; update registration where operations create nexus.
8. Engage a CPA experienced with mixed‑use and commercial property and a tax attorney if liabilities or audits emerge.

Common FAQ — quick answers

Q: Can I allocate all common area costs to residential to lower my commercial tax base?

A: No. Allocations must be reasonable and supportable. Inflating residential allocations to gain more favorable depreciation rates or deductions is an audit risk. Use consistent metrics and documentation.

Q: Who collects sales tax if I lease the salon to a tenant?

A: Typically the operator that makes taxable sales collects sales tax. The lease should clearly allocate this responsibility and include indemnity provisions for noncompliance.

Q: Should I run the salon myself to capture more income?

Operating the salon increases potential revenue but also brings payroll obligations, liability exposure, and sales tax compliance. Leasing to a qualified tenant reduces operating risk and simplifies bookkeeping. Evaluate after-tax returns and risk appetite; consult counsel.

When to bring in specialists (and why now)

Hire these experts early in acquisition or conversion:

• CPA with mixed‑use experience: For allocation methodologies, interest and expense apportionment, and tax planning.
• Cost segregation engineer: To identify short‑life assets and maximize first‑year depreciation benefits.
• Real estate attorney: To draft leases, define responsibilities for sales tax and tenant improvements, and manage liability.
• State sales tax counsel: When operating across jurisdictions or if the salon sells goods online.

Given the 2026 landscape — lower bonus depreciation percentages, evolving state sales tax rules, and increased audit attention — early planning converts uncertainty into predictable outcomes.

Final takeaways

• Be proactive: Document allocation methods now. Waiting invites misallocation and audit risk.
• Depreciation matters: Properly apportion building basis; a cost segregation study often pays for itself.
• Sales tax and payroll: Identify who is the operator and who bears these obligations — put it in the lease.
• Consistency wins: Use one defensible allocation system and stick to it, updating as the building use or tenants change.

If you own or are acquiring a mixed‑use property with a commercial pet salon — whether inspired by One West Point or built from the ground up — you need precise allocation, proper depreciation treatment, and a clear compliance plan for sales tax and payroll. These decisions affect cash flow, audit risk, and long‑term returns.

Next step: Get expert help

We help investors convert mixed‑use complexity into predictable results: basis studies, depreciation planning, lease drafting, and audit defense. If you want a defensible allocation plan or a cost segregation study tailored to your property, contact us for a strategy session.

Schedule a consultation with a tax attorney experienced in mixed‑use allocations and pet salon operations — get clarity before you sign the next deal.

Related Reading

• Case Study: 28% Energy Savings — Retrofitting an Apartment Complex with Smart Outlets
• The Evolution of E‑Signatures in 2026: From Clickwrap to Contextual Consent
• Dynamic Rental Pricing in 2026: Landlord Tactics That Protect Margins Without Driving Tenants Away
• The Complete Guide to International Postage with Royal Mail: Documentation, Costs and Customs
• From Pocket Portraits to Pocket Watches: What a 1517 Renaissance Drawing Teaches Us About Collecting Small Luxury Objects
• NFTs as Licensing Tokens for AI Training Content: Business Models and Standards
• The Evolution of Community Potlucks in 2026: From Casseroles to Climate-Conscious Menus
• Policy-as-Code for Desktop AI: Enforce What Agents Can and Cannot Do
• Staging Your Listing: Cozy Props That Help Sell Cars (Without Faking Condition)