Narrative
In 2021, the owners of a preschool in Sacramento, California, undertook strategic tax planning to enhance their investment. The property consists of a single 2-story building encompassing 1,650 square feet. Originally constructed in 1958, the preschool features 2 units designed to cater to young children.
The building's exterior showcases stucco over masonry construction. The interior is well-appointed, featuring amenities such as ceramic tile flooring, wood roof construction, and contemporary lighting fixtures. The property also includes a wood deck and exterior wood stairs.
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 preschool'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:
- Physical Inspection: conducting a thorough site visit to identify and photograph the property's components
- Document Review: examining architectural plans, construction documents and accounting records
- Cost Analysis: applying engineering principles to allocate costs to specific asset classifications
- Depreciation Calculation: calculating depreciation using IRS-accepted methods such as the Modified Accelerated Cost Recovery System (MACRS)
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Discover MoreAsset Allocation
5-Year Class Life
Total Depreciation Allocation: $119,217.84
Percentage of Total Depreciable Basis: 28.47%
5-year class life assets identified in this study include:
- Electrical systems (dedicated equipment outlets, television connections)
- Appliances (refrigerator, microwave, range hood, dishwasher, washer/dryer)
- Furniture and fixtures (cabinets, shelving, blinds, countertops)
- Interior finishes (wood baseboard, ceiling fans)
- Security systems (security camera)
15-Year Class Life
Total Depreciation Allocation: $47,993.73
Percentage of Total Depreciable Basis: 11.46%
15-year class life assets identified in this study include:
- Land improvements (landscaping, wood fence, aggregate paving, concrete paving, sidewalks)
- Site utilities (exterior GFI outlets)
27.5-Year Class Life
Total Depreciation Allocation: $251,563.43
Percentage of Total Depreciable Basis: 60.07%
27.5-year class life assets identified in this study include:
- Structural components (stucco over masonry, wood roof construction, wood deck)
- Building systems (incoming electrical service, water heater, HVAC)
- Permanent fixtures (restroom fixtures, water closets, lavatories)
- Interior construction (drywall partitions, ceramic tile flooring, CMU walls)
Class Life Details:
Summary
The cost segregation study for this preschool in Sacramento, California 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 cashflow. This approach not only enhanced the preschool'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.
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