Case Study: Cost Segregation Analysis for a Hotel in Niles, Ohio

Narrative

In 2023, the owners of a hotel property in Niles, Ohio undertook strategic tax planning to enhance their investment. The property consists of three 2-story buildings encompassing 34,315 square feet. Originally constructed in 1961, the 74-unit hotel features a variety of amenities designed to cater to guests.

The building’s exterior showcases durable siding and large windows. The interior is well-appointed, featuring high-efficiency HVAC systems, water heaters, and contemporary lighting fixtures. The property also includes recreational facilities such as a pool.

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:

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: $374,161.87 

Percentage of Total Depreciable Basis: 20.42%

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: $192,843.19 

Percentage of Total Depreciable Basis: 10.53%

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: $1,264,994.95 

Percentage of Total Depreciable Basis: 69.05%

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 Niles, Ohio 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.