Case Study: Cost Segregation Analysis for a Gym in Lindale Texas

Narrative

In 2023, the owners of a fitness center in Lindale, TX undertook strategic tax planning to optimize their investment. This single-story building, which was constructed in 2014, spans a total area of 8,421 square feet. The property features a modern design with a metal roof deck, structural steel components and a variety of high-quality materials that support its function as a gym. The property was acquired in 2021 and has been meticulously maintained.

The building includes numerous specialized features such as a fire sprinkler system, HVAC rooftop units and high-efficiency lighting fixtures. Essential amenities such as restrooms with high-end fixtures, water heaters and dedicated fitness spaces enhance the usability of the gym.

A cost segregation study conducted by Engineered Tax Services (ETS) revealed a total depreciable basis of $1,948,390.00, with significant allocations across 5-year, 15-year, and 39-year class lives. By reclassifying various components of the property, the owners were able to accelerate depreciation, resulting in substantial tax savings.

Objective

The primary objective of this cost segregation study was to identify and classify the property's assets to maximize tax savings for the owners. By reclassifying specific components into shorter depreciation life categories, ETS aimed to optimize the property's depreciation schedule. This approach provided immediate and long-term financial benefits, ensuring that each asset was accurately categorized to leverage maximum financial advantages under current tax regulations.

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: $244,104.78

Percentage of Total Depreciable Basis: 12.53%

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

• Specialized electrical equipment
• Communication and security systems
• Television and telephone connections
• Removable flooring
• Wall and ceiling fixtures

15-Year Class Life

Total Depreciation Allocation: $611,786.46

Percentage of Total Depreciable Basis: 31.4%

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

• Fencing
• Signage and lighting poles
• Concrete work
• Storm drainage systems
• Recreational equipment

27.5-Year Class Life

Total Depreciation Allocation: $1,092,498.76

Percentage of Total Depreciable Basis: 56.07%

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

• Structural components
• Exterior doors and windows
• Plumbing fixtures and systems
• HVAC systems
• Fire protection systems
• Permanent interior finishes
• General electrical systems

Class Life Details:

Accumulated Depreciation Comparison:

Summary

The cost segregation study conducted for this gym in Lindale, TX highlights the substantial financial benefits of strategic tax planning. By reclassifying property components into shorter depreciation categories, the property owners accelerated depreciation, maximizing tax savings and improving cashflow. This approach enhanced profitability, optimized capital management and provided the owners with significant tax advantages, demonstrating how cost segregation can enhance the financial performance of commercial real estate investments.