Narrative
n 2023, the owners of a farm in Alberton, Montana, undertook strategic tax planning to enhance their investment. The property consists of a single-story building encompassing 46,126 square feet. Originally constructed in 1980, the farm features 19 units designed to cater to a variety of uses.
The building's exterior showcases a blend of modern and classic architectural elements, including durable wood siding and aluminum panel roofing. The interior is well-appointed, featuring amenities such as wood framing, horse stalls, and contemporary lighting fixtures. The property also includes a range of recreational facilities, including a wood gazebo.
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 farm'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: $1,850,430.71
Percentage of Total Depreciable Basis: 25.49%
5-year class life assets identified in this study include:
- Electrical systems (specialized equipment)
- Appliances (refrigerators, dishwashers, ice machines)
- Furniture and fixtures (cabinets, shelving, mirrors, counters)
- Interior finishes (flooring, ceiling fans, decorative wall treatments)
- Communication and security systems (telephone connections, security cameras)
10-Year Class Life
Total Depreciation Allocation: $301,754.01
Percentage of Total Depreciable Basis: 4.16%
10-year class life assets identified in this study include:
- Certain land improvements (fencing, wood decks)
- Certain building components (overhead doors, mezzanines)
15-Year Class Life
Total Depreciation Allocation: $1,821,925.84
Percentage of Total Depreciable Basis: 25.1%
15-year class life assets identified in this study include:
- Land improvements (paving, sidewalks, fences, landscaping)
- Recreational facilities (gazebo)
- Site utilities and infrastructure (site lighting, signage, septic system)
39-Year Class Life
Total Depreciation Allocation: $3,284,889.44
Percentage of Total Depreciable Basis: 45.25%
39-year class life assets identified in this study include:
- Structural components (walls, doors, windows, roofing)
- Building systems (HVAC, plumbing, electrical distribution)
- Permanent fixtures (restroom fixtures, lighting, signage)
- Interior construction (drywall partitions, flooring, ceilings)
Class Life Details:
Summary
The cost segregation study for this farm in Alberton, Montana 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. This approach not only enhanced the farm'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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