Case Study: Cost Segregation Analysis for a Mixed-Use Building in New York, NY

Narrative

In 2017, the owners of a mixed-use building in New York, NY, sought to optimize their investment through strategic tax planning. The property consists of a single five-story building encompassing 13,183 square feet. Originally constructed in 1900, the building features seven units designed to cater to both residential and commercial tenants.

The building’s exterior showcases classic architectural elements, including a durable brick facade and large windows. The interior is well-appointed, featuring amenities such as high-efficiency HVAC systems, modern plumbing fixtures, and contemporary lighting. The property also includes essential infrastructure such as elevators and fire protection systems.

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 mixed-use building'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: $1,943,414.81
Percentage of Total Depreciable Basis: 25.37%

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

• Electrical systems (specialized equipment)
• Appliances (refrigerators, dishwashers)
• Furniture and fixtures (cabinets, shelving)
• Interior finishes (flooring, ceiling fans)
• Communication systems (telephone connections)

15-Year Class Life

Total Depreciation Allocation: $30,585.87
Percentage of Total Depreciable Basis: 0.4%

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

• Land improvements (sidewalks, fences)
• Site utilities (sewer, water)

27.5-Year Class Life

Total Depreciation Allocation: $2,523,353.95
Percentage of Total Depreciable Basis: 32.94%

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

• Structural components (walls, doors)
• Building systems (HVAC, plumbing)
• Permanent fixtures (restroom fixtures)
• Interior construction (drywall partitions)

Class Life Details:

Partial Asset Disposition (PAD) – 2023

Total Depreciation Allocation: $3,162,645.41
Percentage of Total Depreciable Basis: 41.29%

PAD assets identified in this study include:

• Windows
• Flooring
• Lighting fixtures
• Fire protection systems

Summary

The cost segregation study for this mixed-use building in New York, NY, 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 cash flow. This approach not only enhanced the building'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.