Case Study: Cost Segregation Analysis for a Residential Condo in Jupiter, Florida

Narrative

In 2022, the owners of a residential condominium in Jupiter, Florida, undertook strategic tax planning to enhance their investment. The property consists of a single two-story building encompassing 6,540 square feet with 8 residential units. Originally constructed in 1965, the condo features amenities designed to cater to residents.

The building's exterior showcases a blend of architectural elements. The interior is well-appointed, featuring high-efficiency HVAC systems, water heaters, and contemporary lighting fixtures. Recreational facilities are also included.

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 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

5-Year Class Life

Total Depreciation Allocation: $263,748.49 Percentage of Total Depreciable Basis: 39.2%

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

• Electrical systems (specialized equipment)
• Appliances (refrigerators, dishwashers, laundry equipment)
• Furniture and fixtures (cabinets, shelving, counters)
• Interior finishes (carpet, laminate flooring, decorative elements)
• Communication and security systems (telephone connections, computer connections, alarm systems)

27.5-Year Class Life

Total Depreciation Allocation: $409,121.51 Percentage of Total Depreciable Basis: 60.8%

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

• Structural components (walls, doors, windows, roofing)
• Building systems (HVAC, plumbing, electrical distribution)
• Permanent fixtures (restroom fixtures, lighting, signage)
• Interior construction (drywall, ceramic tile, wood elements)

Class Life Details:

Summary

The cost segregation study for this residential condominium in Jupiter, Florida 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 enhances the condo's profitability and allows for more efficient capital management. The case study illustrates how cost segregation can significantly boost the financial performance of real estate investments.