Case Study: Cost Segregation Analysis for an Apartment Complex in Scarsdale, NY

Narrative

In 2023, the owners of a multi-family apartment complex in Scarsdale, New York, undertook strategic tax planning to enhance their investment. The property consists of a single 3-story building encompassing 99,600 square feet. Originally constructed in 1980, the apartment complex features 64 residential units designed to cater to a variety of tenants.

The property underwent a comprehensive cost segregation study after being acquired in November 2023. The building's total cost basis was $9,200,000 with an additional land value of $2,300,000.

Objective

The primary objective of the cost segregation study was to identify and reclassify specific building components into shorter depreciation life categories to accelerate depreciation deductions and optimize tax benefits for the property owners.

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:  $2,306,736.66 Percentage of Total Depreciable Basis: 25.07%

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

• Electrical systems and outlets
• Appliances (refrigerators, dishwashers, microwaves)
• Cabinet and countertop fixtures
• Flooring and wall coverings
• Security and communication systems

15-Year Class Life

Total Depreciation Allocation:  $208,582.47 Percentage of Total Depreciable Basis: 2.27%

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

• Paving and site improvements
• Landscaping
• Concrete curbs and sidewalks
• Exterior lighting

27.5-Year Class Life

Total Depreciation Allocation: $6,684,680.87 Percentage of Total Depreciable Basis: 72.66%

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

• Building structural elements
• Roof system
• HVAC systems
• Basic electrical and plumbing

Class Life Details:

Summary

The cost segregation study resulted in significant tax benefits:

• Total depreciable basis: $9,200,000
• First-year accumulated depreciation: $2,066,229.05
• Substantial increase in depreciation from $11,290.91 (without cost segregation) to $557,881.85 (with cost segregation) for the initial asset basis

The analysis demonstrates how strategic tax planning through cost segregation can significantly enhance cash flow and provide substantial tax benefits for commercial real estate investors.