Case Study: Cost Segregation Analysis for a Rehabilitation Center in West Palm Beach, Florida

Narrative

In 2023, the owners of a rehabilitation center in West Palm Beach, Florida, undertook strategic tax planning to enhance their investment. The property consists of a single three-story building encompassing an unspecified square footage. Originally constructed in 2005, the rehabilitation center features an unspecified number of units designed to cater to a variety of patients.

The building’s exterior showcases architectural elements, including a stucco over masonry finish. The interior is well-appointed, featuring amenities such as HVAC rooftop units (3-ton), tankless water heaters, and fluorescent lighting fixtures (1ft x 4ft). The property also includes a range of facilities, including an elevator and a wood deck floor construction.

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 rehabilitation center'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: $1,594,277.38 Percentage of Total Depreciable Basis: 23.45%

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

• Kitchen equipment (refrigerators, dishwashers, microwaves)
• Communication systems (telephone connections, television connections)
• Interior finishes (carpet flooring, crown molding)
• Security systems (security cameras, access control)
• Appliances (laundry dryers, laundry washers)
• Furniture and fixtures (cabinets, shelving)

15-Year Class Life

Total Depreciation Allocation: $31,299.38 Percentage of Total Depreciable Basis: 0.46%

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

• Land improvements (asphalt paving, site metal railing)
• Site improvements (PVC/vinyl fence)

39-Year Class Life

Total Depreciation Allocation: $5,174,423.24 Percentage of Total Depreciable Basis: 76.09%

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

• Structural components (building footings, concrete support columns, CMU walls)
• Building systems (HVAC, plumbing, electrical distribution, fire sprinkler system)
• Permanent fixtures (restroom fixtures, lighting fixtures, fire extinguishers)
• Interior construction (drywall partitions, ceilings, ceramic tile flooring)
• Exterior finishes (stucco over masonry, windows)
• Roofing (clay tile roof, EPDM roof)
• Elevator

Class Life Details:

Summary

The cost segregation study for this rehabilitation center 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 cash flow. The study resulted in an increase in depreciation of $1,348,914.95 for the 2023 tax year. This approach not only enhanced the rehabilitation center'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.