Cost Segregation Case Study

The best way to illustrate the direct financial benefits of a Cost Segregation Study is through the following KBKG case study:

Cost Segregation Present Value Savings Analysis for an Apt. Complex
A taxpayer constructed an apartment building for $2.2 million and placed it in service in 2005. Initially, $200,000 is identified for furniture and equipment such as stoves, dishwashers, and other appliances. The remaining $2 million of project costs are treated as 27.5-year property.

Assume the following:

  • 16% of the construction-related costs should have been classified to a 5-year depreciable life, as identified by the Cost Segregation Specialist
  • 9% of the cost should have been classified to a 15-year depreciable life, as identified by the specialist
  • 41% federal and state tax rate
  • 8% expected rate of return

The following is how the depreciation deductions would compare in the first 5 years with a Cost Segregation Study verses without a Cost Segregation Study:

Increased Deductions with a Cost Segregation Study

The potential benefits derived from a Cost Segregation Study could be significant whether a company is adding a $500,000 expansion or building a new $40 million hotel. The benefits of a study are magnified even more if it falls within the bonus depreciation time period.
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