Cost Segregation Analysis for an Office Building in Louisville, KY

Narrative

In 2021, the owners of an office building in Louisville, KY, undertook strategic tax planning to enhance their investment. The property consists of a single 2-story building encompassing 5,237 square feet. Originally constructed in 1946, the office building features 1 unit designed to cater to a variety of tenants.

The building's exterior showcases a blend of modern and classic architectural elements, including a durable vinyl siding exterior and large aluminum windows. The interior is well-appointed, featuring amenities such as high-efficiency HVAC systems, electric water heaters, and contemporary fluorescent lighting fixtures. The property also includes a range of recreational facilities, including an asphalt paved parking lot.

The owners engaged Engineered Tax Services (ETS) to perform a comprehensive cost segregation study of the property. This 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 goal of the cost segregation study was to identify and classify the complex’s components, allowing the owners to maximize their tax savings. By segregating and reclassifying specific assets, ETS aimed to provide immediate and long-term financial benefits through optimized 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: $126,817.41
Percentage of Total Depreciable Basis: 19.78%

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

• Electrical systems (specialized equipment)
• Appliances (refrigerators, microwaves)
• Furniture and fixtures (cabinets, counters)
• Interior finishes (flooring, ceiling fans, decorative wall treatments)
• Communication and security systems (telephone connections, security alarm system)

15-Year Class Life

Total Depreciation Allocation: $54,067.41
Percentage of Total Depreciable Basis: 8.43%

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

• Land improvements (asphalt paving, sidewalks, landscaping)
• Site utilities and infrastructure (site lighting, signage)

39-Year Class Life

Total Depreciation Allocation: $460,215.18
Percentage of Total Depreciable Basis: 71.79%

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

• Structural components (walls, doors, windows, roofing)
• Building systems (HVAC, plumbing, electrical distribution)
• Permanent fixtures (restroom fixtures, emergency lighting)
• Interior construction (drywall partitions, flooring, ceilings)

Class Life Details:

Summary

The cost segregation study for this office building in Louisville, KY, demonstrates the substantial financial advantages of strategic tax planning. By reclassifying property components into shorter depreciation categories, the study enabled accelerated depreciation, resulting in maximized tax savings and improved cashflow. This approach not only enhanced the office building's profitability but also allowed for more efficient capital management and future property upgrades. The case study illustrates how cost segregation can significantly boost the financial performance of real estate investments.