Case Study: Cost Segregation Analysis for a Residential Home in Washington, DC

Narrative

In 2020, the owners of a residential home in Washington, DC undertook strategic tax planning to enhance their investment. The property consists of a single 2-story building encompassing 1,386 square feet. Originally constructed in 1940, the home features 1 unit designed for residential living.

The building's exterior showcases a blend of classic architectural elements, including a durable brick facade. The interior is well-appointed, featuring amenities such as a gas water heater, contemporary lighting fixtures, and hardwood flooring. The property also includes a wood deck and concrete patio for outdoor living space.

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:

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