Case Study: Cost Segregation Analysis for a Multifamily Apartment Complex In Florida

Narrative

In early 2022, the owners of a multifamily apartment complex in Florida sought to optimize their investment through strategic tax planning. The property, located in Leesburg, consists of 14 two-story residential buildings housing a total of 48 units. Constructed in 1988, the complex spans 41,137 square feet and has an overall value of $2,636,934.00. 

The buildings feature a combination of brick veneer and wood siding exteriors with asphalt shingle roofs. Residential spaces offer a combination of sliding glass doors and windows, ensuring ample natural light. The well-maintained grounds include a variety of land improvements such as parking spaces, fencing, sidewalks, landscaping and outdoor lighting.

Seeking a strategic advantage, the owners of this property partnered with Engineered Tax Services (ETS) to unlock the hidden potential of accelerated depreciation. This case study explores their cost segregation strategy and its impact on the property's financial future.

Objective

The primary goal of the cost segregation study was to identify and classify the complex’s components, allowing the owners to maximize their tax savings. By segregating and reclassifying specific assets, ETS aimed to provide immediate and long-term financial benefits through optimized 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: $597,577.28

Percentage of Total Depreciable Basis: 22.66%

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

• Electrical systems (specialized equipment)
• Appliances
• Furniture and fixtures
• Movable flooring
• Office and communication equipment

15-Year Class Life

Total Depreciation Allocation: $255,836.87

Percentage of Total Depreciable Basis:
9.7%

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

• Parking and sidewalks
• Fences
• Landscaping
• Light poles
• Signage

27.5-Year Class Life

Total Depreciation Allocation: $1,783,519.85

Percentage of Total Depreciable Basis: 67.64%

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

• Siding, windows, doors and roofing
• HVAC systems
• Electrical service and distribution systems
• Plumbing fixtures
• Interior finishes

Class Life Details:

Accumulated Depreciation Comparison:

Summary

The cost segregation study for this multifamily apartment complex demonstrates how strategic tax planning can significantly benefit property owners. By utilizing accelerated depreciation, the owners were able to enhance profitability, improve cashflow, and plan effectively for future expenditures.