Case Study: Cost Segregation Analysis for an Apartment Building in Sun Prairie, WI

Narrative

In 2021, the owners of a residential apartment building in Sun Prairie undertook a strategic tax planning initiative to enhance their investment returns. The property consists of a two-story building encompassing multiple residential units, originally constructed in 1994. The building features a blend of modern amenities and traditional architectural elements, including brick veneer exterior, wood framing, and extensive interior improvements.

The property includes various residential amenities such as fully-equipped kitchens, modern HVAC systems, and updated electrical systems. Each unit is furnished with modern appliances including refrigerators, dishwashers, and in-unit laundry facilities. The building's common areas and individual units feature a mix of flooring types including ceramic tile, vinyl plank, and carpeting.

Objective

The primary objective of the cost segregation study was to identify and reclassify building components into shorter depreciation life categories, thereby accelerating depreciation deductions and optimizing tax benefits for the property owner. The analysis focused on segregating personal property and land improvements from the building structure.

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 Allocation: $101,677.75  Percentage of Total Basis: 29.02%

Key components included:

• Kitchen appliances (refrigerators, ranges, dishwashers)
• Cabinetry and countertops
• Electrical systems and fixtures
• Carpeting and vinyl flooring
• Window treatments

15-Year Class Life

Total Allocation: $20,023.52  Percentage of Total Basis: 5.71%

Key components included:

• Concrete paving
• Brick pavers
• Site improvements
• Landscape edging

27.5-Year Class Life

Total Allocation: $228,676.72  Percentage of Total Basis: 65.27%

Key components included:

• Building structure
• Roof system
• Basic electrical
• Plumbing systems
• HVAC components

Class Life Details:

Summary

The cost segregation study identified significant opportunities for accelerated depreciation through the reclassification of assets. The analysis resulted in:

• Total depreciable basis: $350,378.00
• Land value: $87,595.00
• Accumulated depreciation through 2024: $154,616.88
• Total depreciation increase: $104,183.68

The study's findings enable substantial tax savings through accelerated depreciation, particularly in the early years of ownership. This approach provides immediate cash flow benefits while maintaining compliance with IRS guidelines and regulations.