Case Study: Cost Segregation Analysis for a Commercial Building in Great Neck, NY

Narrative

In 2015, the owners of a commercial building in Great Neck, NY sought to enhance their investment through strategic tax planning. The property consists of a single building originally constructed in 2015 with a total cost basis of $7,000,000 (not including land).

The owners engaged Engineered Tax Services (ETS), a licensed engineering firm specializing in cost segregation studies, to perform a comprehensive analysis of the property. The study aimed to identify and reclassify specific assets, enabling the acceleration of depreciation and optimizing tax benefits. This case study outlines the cost segregation strategy employed and its significant impact on the financial outlook of the property.

Objective

The primary objective of the cost segregation study was to identify and classify the building's assets to optimize the owners' tax savings. By breaking down and reallocating components into shorter depreciation life categories, ETS aimed to provide both immediate and long-term financial benefits through accelerated depreciation.

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: $1,196,058.90 

Percentage of Total Depreciable Basis: 17.09%

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

• specialized electrical systems
• appliances
• furniture and fixtures
• certain interior finishes
• communication and security systems.

15-Year Class Life

Total Depreciation Allocation: $331,519.64 

Percentage of Total Depreciable Basis: 4.74%

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

• land improvements
• certain site utilities
• infrastructure

39-Year Class Life

Total Depreciation Allocation: $5,472,421.46 

Percentage of Total Depreciable Basis: 78.18%

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

• the building structure
• core systems
• permanent fixtures
• interior construction

Class Life Details:

Accumulated Depreciation Comparison:

Summary

The cost segregation study for this commercial building in Great Neck, NY demonstrates the substantial financial advantages of strategic tax planning. By reclassifying property components into shorter depreciation categories, the study enabled accelerated depreciation, resulting in over $1 million in additional accumulated depreciation deductions in the first 8 years alone. This approach enhances the building's profitability, improves cash flow, and allows for more efficient capital management and future improvements. The case study illustrates how cost segregation can significantly boost the financial performance and tax efficiency of commercial real estate investments.