Narrative
In 2023, the owners of a Single-Family Residence in West Palm Beach, Florida, undertook strategic tax planning to enhance their investment. The property consists of a single 2-story building encompassing 2,806 square feet. Originally constructed in 2023, the house features modern amenities and finishes.
The building's exterior showcases a blend of architectural elements, including fiber cement siding and asphalt shingle roofing. The interior is well-appointed, featuring amenities such as high-efficiency HVAC systems, a water heater, and contemporary lighting fixtures. The property also includes a patio screen enclosure and an in-ground swimming pool.
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 objective of the cost segregation study was to identify and classify the house'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:
- Physical Inspection: conducting a thorough site visit to identify and photograph the property's components
- Document Review: examining architectural plans, construction documents and accounting records
- Cost Analysis: applying engineering principles to allocate costs to specific asset classifications
- Depreciation Calculation: calculating depreciation using IRS-accepted methods such as the Modified Accelerated Cost Recovery System (MACRS)
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Discover MoreAsset Allocation
5-Year Class Life
Total Depreciation Allocation: $175,378.41
Percentage of Total Depreciable Basis: 20.83%
5-year class life assets identified in this study include:
- Electrical systems (dedicated equipment outlets, television connections)
- Appliances (dishwasher, refrigerator, oven/range, microwave, washer/dryer)
- Decorative lighting (pendant fixtures, sconces, chandeliers)
- Interior finishes (wood panel wallcovering, crown molding, window treatments)
- Cabinetry and countertops
15-Year Class Life
Total Depreciation Allocation: $69,056.62
Percentage of Total Depreciable Basis: 8.20%
15-year class life assets identified in this study include:
- Land improvements (landscaping, irrigation system, brick pavers)
- Recreational facilities (in-ground swimming pool, pool heater, pool equipment)
- Concrete equipment pad
39-Year Class Life
Total Depreciation Allocation: $597,414.99
Percentage of Total Depreciable Basis: 70.96%
39-year class life assets identified in this study include:
- Structural components (wood framing, roof construction, CMU walls, drywall)
- Building systems (HVAC, plumbing, electrical distribution, water heater)
- Permanent fixtures (restroom fixtures, windows, interior/exterior doors)
- Interior construction (ceramic tile, wood flooring, stairs)
Class Life Details:
Summary
The cost segregation study for this Single-Family Residence in West Palm Beach, Florida 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 house'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.
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