Case Study: Cost Segregation Analysis for a Multi-Family Apartment Complex in Boerne, Texas

Narrative

In 2024, the owners of a multi-family apartment complex in Boerne, Texas, undertook strategic tax planning to enhance their investment. The property consists of 22 three-story buildings encompassing 52,987 square feet. Originally constructed in 2020, the apartment complex features 238 residential units designed to cater to various tenant needs.

The buildings showcase modern architectural elements and amenities including high-efficiency HVAC systems, water heaters, and contemporary lighting fixtures. The property also includes extensive site improvements such as concrete paving, landscaping, pool facilities, and parking areas.

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.

Objective

The primary objective was to identify and classify the apartment complex's assets to optimize tax savings through accelerated depreciation. The total project cost basis was $55,395,500 with land value of $2,104,500.

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 Allocation: $20,461,370.08 

Percentage of Total Basis: 36.94%

Key assets identified include:

• Kitchen appliances and fixtures
• Electrical systems and wiring
• Carpeting and flooring
• Cabinet and millwork
• Security systems

15-Year Class Life

Total Allocation: $5,266,501.88 

Percentage of Total Basis: 9.51%

Key assets identified include:

• Site improvements
• Paving and curbing
• Landscaping
• Pool facilities
• Outdoor lighting

27.5-Year Class Life

Total Allocation: $29,667,628.04 

Percentage of Total Basis: 53.56%

Key assets identified include:

• Building structure
• Roof system
• Foundation
• Basic electrical
• Plumbing systems

Class Life Details:

Summary

The cost segregation study resulted in significant tax savings through accelerated depreciation. The first-year accumulated depreciation increased from $923,258.33 to $17,673,423.29, providing an additional benefit of $16,750,164.96. This reclassification of assets allows for substantial immediate tax savings and improved cash flow for the property owners.