Case Study: Cost Segregation Analysis for a Arizona Hotel

Narrative

In 2023, the owners of a hotel in Williams, AZ embarked on a mission to enhance their investment through strategic tax planning. This property, acquired in 2023, consists of four single-story buildings, encompassing a total of eight units. Originally built in 1925, the hotel spans 6,288 square feet and holds a depreciable basis of $1,137,312.00.

The buildings feature wood siding exteriors with a combination of asphalt shingle and steel panel roofs. The hotel units are equipped with modern amenities including HVAC systems, ceramic tile flooring and custom cabinetry. The property grounds include significant land improvements such as exterior wood decks, metal carport canopies and landscaped areas.

To capitalize on the available tax benefits, the owners partnered with Engineered Tax Services (ETS) to conduct a comprehensive cost segregation study. This case study outlines their cost segregation strategy, revealing how it optimized the depreciation schedule and maximized tax savings for the property.

Objective

The primary objective of this cost segregation study was to identify and classify the hotel's various components to optimize the owners' tax benefits. The study sought to ensure that every eligible asset was accurately categorized, providing immediate and long-term financial advantages by maximizing depreciation under the current tax laws.

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