Case Study: Cost Segregation Analysis for a Preschool in Sacramento, California

preschool

Narrative

In 2021, the owners of a preschool facility in Sacramento, California engaged in strategic tax planning to optimize their real estate investment. The property consists of a two-story building encompassing 5,078 square feet. Originally constructed in 1903, the preschool has been well-maintained and updated to meet modern educational standards.

The building features both traditional and contemporary elements, including durable exterior finishes and ample windows for natural lighting. The interior is equipped with modern amenities including HVAC systems, commercial kitchen facilities, and specialized educational spaces. The property underwent significant improvements to create an optimal learning environment for young children.

Objective

The primary objective of the cost segregation study was to identify and classify the school'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)

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Asset Allocation

5-Year Class Life

Total Allocation: $118,131.76 Percentage of Total: 21.4%

Key components included:

  • Dedicated electrical systems
  • Kitchen equipment and appliances
  • Cabinetry and built-in furniture
  • Security systems
  • Specialized lighting fixtures

15-Year Class Life

Total Allocation: $32,488.31 Percentage of Total: 5.89%

Key components included:

  • Site improvements
  • Landscaping
  • Paving and concrete work
  • Exterior lighting
  • Fencing

39-Year Class Life

Total Allocation: $401,379.92 Percentage of Total: 72.71%

Key components included:

  • Building structure
  • Standard electrical systems
  • HVAC systems
  • Plumbing systems
  • Interior walls and finishes

Class Life Details:

Summary

The cost segregation study for this Sacramento preschool facility resulted in significant tax benefits through accelerated depreciation. The analysis identified $150,620.07 (27.29%) of the property's cost basis that could be depreciated over 5 and 15-year periods instead of the standard 39-year period. This reclassification resulted in substantial first-year bonus depreciation and increased cash flow for the property owner.

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