Case Study: Cost Segregation Analysis for a Arizona Hotel

Narrative

In 2023, the owners of a hotel in Williams, AZ embarked on a mission to enhance their investment through strategic tax planning. This property, acquired in 2023, consists of four single-story buildings, encompassing a total of eight units. Originally built in 1925, the hotel spans 6,288 square feet and holds a depreciable basis of $1,137,312.00.

The buildings feature wood siding exteriors with a combination of asphalt shingle and steel panel roofs. The hotel units are equipped with modern amenities including HVAC systems, ceramic tile flooring and custom cabinetry. The property grounds include significant land improvements such as exterior wood decks, metal carport canopies and landscaped areas.

To capitalize on the available tax benefits, the owners partnered with Engineered Tax Services (ETS) to conduct a comprehensive cost segregation study. This case study outlines their cost segregation strategy, revealing how it optimized the depreciation schedule and maximized tax savings for the property.

Objective

The primary objective of this cost segregation study was to identify and classify the hotel's various components to optimize the owners' tax benefits. The study sought to ensure that every eligible asset was accurately categorized, providing immediate and long-term financial advantages by maximizing depreciation under the current tax laws.

Methodology

ETS employed a detailed, engineering-based approach, which included:

1. Physical Inspection: conducting a thorough site visit to identify and photograph the property's components
2. Document Review: examining architectural plans, construction documents and accounting records
3. Cost Analysis: applying engineering principles to allocate costs to specific asset classifications
4. Depreciation Calculation: calculating depreciation using IRS-accepted methods such as the Modified Accelerated Cost Recovery System (MACRS)

Asset Allocation

5-Year Class Life

Total Depreciation Allocation: $237,801.38

Percentage of Total Depreciable Basis: 20.91%

5-year class life assets identified in this study include:

• Electrical systems
• Appliances
• Furniture and fixtures
• Security equipment
• Removable flooring and wall treatments
• Accent lighting

15-Year Class Life

Total Depreciation Allocation: $140,728.86

Percentage of Total Depreciable Basis: 12.37%

15-year class life assets identified in this study include:

• Exterior wooden decks
• Landscape edging and concrete paving
• Fencing and railings
• Site lighting and signage
• Walkways and parking areas

39 -Year Class Life

Total Depreciation Allocation: $758,781.75

Percentage of Total Depreciable Basis: 66.72%

39-year class life assets identified in this study include:

• Building structural components
• Roofing
• Siding, windows and doors
• Plumbing systems
• HVAC systems
• Electrical service and distribution systems
• Permanent interior finishes

Class Life Details:

Accumulated Depreciation Comparison:

Summary

The cost segregation study for this hotel in Williams, AZ, illustrates the substantial financial advantages achievable through strategic tax planning. By reclassifying property components into shorter depreciation categories, the study facilitated accelerated depreciation, maximizing tax savings and enhancing cash flow. This approach improved capital management and supported investment in property upgrades, underscoring how cost segregation can significantly enhance the financial performance of real estate investments.