Case Study: Cost Segregation Analysis for a Residential Condo in Herndon, VA

Narrative

In 2017, the owners of a residential condo in Herndon, VA, undertook strategic tax planning to enhance their investment. The property consists of a single 1-story unit encompassing 1,333 square feet. Originally constructed in 2016, the condo features modern amenities designed for comfortable living.

The condo's interior showcases contemporary finishes, including high-quality wood flooring, granite countertops, and custom cabinetry. The unit is well-appointed with energy-efficient appliances, including a refrigerator, dishwasher, and stackable washer and dryer. The living space features a gas fireplace for added ambiance and comfort.

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 residential condo'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)

Asset Allocation