Narrative
In 2022, the owners of a hotel in Newark, New Jersey, undertook strategic tax planning to enhance their investment. The property consists of a single 12-story building encompassing 150,000 square feet. Originally constructed in 1995, the hotel features 225 units designed to cater to a variety of guests.
The building's exterior showcases a blend of modern and classic architectural elements, including a durable brick facade and large double-pane windows. The interior is well-appointed, featuring amenities such as high-efficiency central HVAC systems, tankless water heaters, and contemporary LED lighting fixtures. The property also includes a range of recreational facilities, including a swimming pool with a spacious sundeck.
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 hotel'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: $2,500,000
Percentage of Total Depreciable Basis: 15%
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, key card readers, security cameras)
15-Year Class Life
Total Depreciation Allocation: $3,750,000
Percentage of Total Depreciable Basis: 22.5%
15-year class life assets identified in this study include:
- Land improvements (parking spaces, sidewalks, fences, landscaping)
- Recreational facilities (pool, pool deck)
- Site utilities and infrastructure (site lighting, signage, utility sinks)
39-Year Class Life
Total Depreciation Allocation: $10,416,667
Percentage of Total Depreciable Basis: 62.5%
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, emergency lighting, signage)
- Interior construction (drywall partitions, flooring, ceilings)
Class Life Details:
Summary
The cost segregation study for this hotel in Newark, New Jersey, 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 cashflow. This approach not only enhanced the hotel'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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