Case Study: Cost Segregation Analysis for a Residential Condo in Duluth, Minnesota

Narrative

In 2024, the owners of a residential condo unit in Duluth, Minnesota, undertook a strategic tax planning initiative to enhance their investment returns. The property consists of a single-story unit encompassing 2,139 square feet. Originally constructed in 1882, the condo has undergone significant modern upgrades while maintaining its historic character.

The property features high-end finishes and amenities, including custom closet systems, premium appliances, and modern electrical and mechanical systems. The renovation incorporated energy-efficient fixtures, custom cabinetry, and quality flooring materials throughout the space.

Objective

The primary objective of the cost segregation study was to identify and reclassify eligible building components into shorter depreciation life categories, thereby accelerating depreciation deductions and improving cash flow for the property owner. The analysis focused on segregating personal property and land improvements from the building structure.

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: $286,117.10 Percentage of Total Basis: 42.39%

Key components included:

• Custom closet systems
• Kitchen appliances and fixtures
• Electrical systems and lighting
• Flooring and wall coverings
• Cabinetry and millwork

39-Year Class Life

Total Allocation: $388,882.90 Percentage of Total Basis: 57.61%

Key components included:

• Building structure
• HVAC systems
• Plumbing systems
• Basic electrical
• Interior walls and ceilings

Class Life Details:

Summary

The cost segregation study identified significant opportunities for accelerated depreciation. The analysis resulted in reclassifying 42.39% of the property's total depreciable basis of $675,000 into 5-year property, with the remaining 57.61% classified as 39-year property.

The study's findings will generate substantial tax savings through:

• Enhanced cash flow through accelerated deductions
• First-year accumulated depreciation of $199,960.78
• Total increase in accumulated depreciation of $190,585.78 compared to straight-line depreciation