Narrative
In 2021, the owners of a residential home in Long Beach, California, undertook strategic tax planning to enhance their investment. The property consists of a single two-story building encompassing 2,329 square feet. Originally constructed in 1964, the home features 4 units designed for residential living.
The building's exterior showcases a blend of stucco over wood framing and wood siding. The interior is well-appointed, featuring amenities such as mini-split HVAC systems, wood roof construction, and contemporary lighting fixtures. The property also includes a wood deck and concrete paving.
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 home'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)
Learn More About Cost Segregation
Explore the benefits of cost segregation and how it can enhance your property's profitability. Dive deeper into our strategies.
Discover MoreAsset Allocation
5-Year Class Life
Total Depreciation Allocation: $296,629.17 Percentage of Total Depreciable Basis: 30.09%
5-year class life assets identified in this study include:
- Appliances (refrigerators, dishwashers, ovens, microwaves)
- Cabinetry and countertops
- Flooring (laminate wood)
- Interior finishes (molding, blinds)
- Plumbing fixtures (sinks, faucets, garbage disposals)
15-Year Class Life
Total Depreciation Allocation: $65,440.65 Percentage of Total Depreciable Basis: 6.64%
15-year class life assets identified in this study include:
- Land improvements (concrete paving, curbing, fencing, artificial turf)
- Storm drainage systems
- Exterior doors and windows
27.5-Year Class Life
Total Depreciation Allocation: $623,667.18 Percentage of Total Depreciable Basis: 63.27%
27.5-year class life assets identified in this study include:
- Structural components (walls, roof, framing, drywall)
- Electrical and plumbing systems
- HVAC systems
- Permanent fixtures (bathtubs, showers, toilets)
Class Life Details:
Summary
The cost segregation study for this residential home in Long Beach, 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 home'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 residential real estate investments.
Unlock Your Tax Savings
Discover how cost segregation can maximize your tax benefits and improve cash flow. Get started today with a free consultation.
Get Your Free Consultation