Case Study: Cost Segregation Analysis for a Hotel Property in DeSoto, Texas

Narrative

In 2024, the owners of a hotel property in DeSoto, Texas, undertook strategic tax planning to enhance their investment. The property consists of a single 4-story building encompassing approximately 61,570 square feet. Originally constructed in 1986, the hotel features multiple guest rooms designed to cater to various travelers.

The building's exterior showcases a blend of modern and traditional elements, including stucco finish and stone veneer. The interior is well-appointed with contemporary amenities such as a commercial kitchen, laundry facilities, and modern HVAC systems. The property also includes various recreational facilities including a swimming pool and playground equipment.

Objective

The primary objective of the cost segregation study was to identify and reclassify specific building components into shorter depreciation life categories to accelerate depreciation deductions and optimize tax benefits for the property owner. The total depreciable basis analyzed was $5,270,000.

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: $909,576.14  Percentage of Total Basis: 17.26%

Key components identified include:

• Kitchen equipment and appliances
• Security systems and key card readers
• Specialized electrical systems
• Laundry equipment
• Carpet and flooring
• Communications systems

15-Year Class Life

Total Depreciation Allocation: $374,348.14 Percentage of Total Basis: 7.1%

Key components identified include:

• Paving and site improvements
• Landscaping and irrigation
• Site lighting
• Concrete curbing
• Retaining walls
• Signage

39-Year Class Life

Total Depreciation Allocation: $3,986,075.71 Percentage of Total Basis: 75.64%

Key components identified include:

• Building structural elements
• Basic electrical systems
• Plumbing systems
• HVAC main systems
• Roofing
• Interior walls and ceilings

Class Life Details:

Summary

The cost segregation study for this DeSoto hotel property resulted in significant tax benefits through the acceleration of depreciation deductions. The analysis identified $1,283,924.28 (24.36%) of the total depreciable basis that could be reclassified to shorter recovery periods. The first-year accumulated depreciation increased from $106,976.50 to $931,521.55, resulting in an additional benefit of $824,545.05 in accelerated depreciation deductions.