Apartment Cost Segregation Case Study

Cost Segregation Case Study: Unlocking Substantial Tax Savings for the Apartment Owner

Client Overview: A local real estate investor owned a short term rental property with an initial building basis of $2,500,000.00.

Objective: The primary goal was to identify and reclassify assets within the property to accelerate depreciation deductions, thereby maximizing tax benefits.

Property Details:

• Starting Building Basis: $2,500,000.00
• Property Classification: 27.5- year, 15-year and 5-year assets
• Bonus Depreciation: 80%

Cost Segregation Process: Our experienced team conducted a thorough cost segregation study, meticulously analyzing every component of the property to determine proper classifications.

1. Identification of 15-year Property: We identified components with a 15-year depreciable life, ensuring they were appropriately reclassified. This included items such as site improvements like parking lot, landscaping and irrigation system.
2. Identification of 5-year Property: Components with a shorter depreciable life, such as certain equipment, were identified as 5-year property. This category included items such as certain millwork and flooring and some electrical and plumbing components among others.
3. Bonus Depreciation Optimization: Leveraging the tax advantages provided by the Tax Cuts and Jobs Act, we applied an 80% bonus depreciation to eligible assets. This provided an immediate and significant reduction in the client’s taxable income.

Results:

• Ending Benefit 15-year: $130,000
• Ending Benefit 5-year Property: $525,000
• Bonus Depreciation Utilized: 80%
• Net Tax Savings: Substantial

Impact on Client’s Finances: The cost segregation study resulted in a remarkable transformation of the client’s tax landscape. By reclassifying assets and leveraging bonus depreciation, the client not only gained immediate tax relief but also enhanced cash flow for future investments.

Conclusion: This case study illustrates the effectiveness of a well-executed cost segregation strategy on 27.5-year short term rental properties. Our client experienced a significant reduction in taxable income, unlocking substantial savings and strengthening their financial position. Cost segregation continues to be a valuable tool for businesses looking to optimize their tax position and improve overall financial performance.