Case Study: Cost Segregation Analysis for a Residential Condo in Margate, NJ

Narrative

In 2024, the owners of a residential condominium unit in Margate, New Jersey, undertook a strategic tax planning initiative through a cost segregation study. The property, a two-story residential condo unit, was acquired for $1,360,000 and placed in service on December 9, 2024. The property features modern amenities and is utilized as a short-term rental property.

Objective

The primary objective was to identify and reclassify qualifying building components into shorter depreciation life categories to accelerate depreciation deductions and improve cash flow through tax savings.

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: $539,012.13 Percentage of Total Depreciable Basis: 39.6%

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

• Kitchen equipment and appliances
• Electrical systems
• Cabinetry and fixtures
• Flooring
• HVAC components

27.5-Year Class Life

Total Depreciation Allocation: $820,987.87 Percentage of Total Depreciable Basis: 60.4%

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

• Building structure
• Walls and ceilings
• Plumbing systems
• Basic electrical
• Other structural elements

Class Life Details:

Summary

The cost segregation study for this Margate, NJ condominium resulted in significant tax savings through accelerated depreciation. By reclassifying 39.6% of the property cost to 5-year property, the study generated a first-year increase in depreciation of $333,370.83. This acceleration of depreciation deductions provides immediate tax savings and improved cash flow for the property owner, while maintaining compliance with IRS guidelines and requirements.