The Power of Cost Segregation Analysis: Maximizing Tax Benefits for Residential Real Estate Owners

Tax professionals and CPAs strive to provide the best possible services and advice to their clients. This often requires a delicate balance between acting in a client’s best interest while complying with applicable laws. When seeking to extend tax benefits for owners of apartment complexes, residential multifamily properties, and mixed-use condo developments, working with a qualified cost segregation provider is an ideal solution. Cost segregation real estate studies offer several benefits.

Cost Segregation Expertise

Real estate cost segregation studies by KBKG provide invaluable data for both financial professionals and their clients. Tax professionals and CPAs already know cost segregation basics, but KBKG takes the process further. We isolate building structural components, including roofs, windows, and HVAC units. We also detail individual tenant leasehold improvements on leased properties. Owners can use this data to claim loss deductions upon replacement and enjoy more tax savings.

Proof in the Data

A cost segregation study real estate offers unique advantages for owners of apartment complexes, multifamily residential rental properties, and mixed-use buildings. Several KBKG case studies illustrate how the process can play out for each of these property types.

Apartment Complexes

KBKG performed an apartment cost segregation study for a property with 18,400 square feet of building space. Minus land, the property’s initial purchase price was $2.48 million. Applicable federal and state tax rates were 29.6% and 5% respectively, with a combined total rate of 34.6%. This property had an 8% ROI factor and 100% bonus depreciation. The study revealed additional tax deductions of $683,000 during the first year plus several revised tax life allocations:

  • $471,200 at five years
  • $223,200 at 15 years
  • $1,785,600 at 27.5 years

The study also revealed net present values of $181,685 over 10 years and $140,680 over the property’s remaining life.

Residential Rental Properties

Cost segregation analysis real estate also works for small multifamily residential rental properties. This is proven by a case study on a two-story residential duplex measuring 2,000 square feet and with a depreciable basis of $300,000. The study uncovered some additional reclassifications:

  • First-year deductions: $21,000
  • Five-year deductions: $28,000

These benefits had a net present value of $7,500 with a 40% tax rate and an 8% ROI.

Mixed-Use Properties

Mixed-use condo developments are particularly challenging due to their combination of residential and commercial spaces. A condo tax basis allocation study can be beneficial in these cases. Using similar techniques as cost segregation studies, a KBKG Certified Cost Segregation Specialist allocates costs based on functional usage or measurable qualities such as square footage.

One case study involved a $15 million mixed-use building with 10,000 square feet of residential condominiums, 20,000 square feet of retail space, and a shared garage and lobby. A CCSP discovered an additional $800,000 in garage, lobby, HVAC, and plumbing costs applicable to the condominiums. This led to $280,000 in tax savings during the first year.

Your Trusted Tax Professionals

Information is critical in maximizing tax benefits. KBKG delivers industry-leading tax expertise and turnkey solutions to businesses and CPAs. Request a proposal to learn how our cost segregation real estate studies can benefit your clients.