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 of an Apartment Building Construction
A taxpayer completes a $5 million construction of an apartment building. $500,000 of the construction costs are initially identified by the taxpayer as furniture and equipment related (i.e. stoves, dishwashers and other appliances). The remaining $4.5 million of project costs are classified as building real property and depreciated over a 27.5-year class life by the taxpayer. The taxpayer appropriately decides to conduct a Cost Segregation Study in the tax year the project was completed and placed-into-service.
After the thorough analysis of the $4.5 million building real property by a Certified Cost Segregation Specialist, certain costs are identified as tangible personal property and land improvements. The results of the analysis are as follows:
- 17% of the $4.5 million identified as personal property (5-year depreciable class life)
- 8% of the $4.5 million identified as land improvements (15-year depreciable class life)
- 75% of the $4.5 million remains as structural real property (27.5-year depreciable class life)
Tax Benefits & Present Value Savings as a Result of the Cost Segregation:
The following chart depicts the difference between total depreciation deductions of the apartment building for the first five years with and without a Cost Segregation Study:
Depending on when this building was placed in service, bonus depreciation rules may further accelerate the timing of these deductions.
The potential tax saving benefits derived from a Cost Segregation Study can be significant based on the cost basis of the project and type of property. Typically capital improvement projects larger than $500,000 or greater can benefit from cost segregation.
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