Case Study: Cost Segregation Analysis for a Residential Property in Hilton Head Island, SC

Narrative

In 2024, the owners of a three-story residential property in Hilton Head Island, South Carolina, sought to optimize their tax position through strategic tax planning. The property consists of a 4,848 square foot single-family home originally constructed in 2001. The building features modern amenities and high-end finishes throughout its three floors.

The property includes various luxury amenities such as a swimming pool, hot tub, movie theater room, and custom finishes. The exterior showcases fiber cement siding, while the interior features high-end fixtures including custom cabinetry, granite countertops, and specialized lighting systems.

Objective

The primary goal of the cost segregation study was to identify and reclassify specific building components into shorter depreciation life categories, thereby accelerating depreciation deductions and optimizing tax benefits for the property owner.

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: $249,901.23 Percentage of Total Depreciable Basis: 15.86%

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

• Kitchen appliances and fixtures
• Electrical systems and specialized wiring
• Custom cabinetry and built-ins
• Entertainment systems
• Specialized lighting fixtures

15-Year Class Life

Total Depreciation Allocation: $234,457.85 Percentage of Total Depreciable Basis: 14.88%

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

• Swimming pool and equipment
• Landscaping and irrigation systems
• Concrete pavers and paving
• Fencing and outdoor improvements
• Site utilities

39-Year Class Life

Total Depreciation Allocation: $1,091,403.26 Percentage of Total Depreciable Basis: 69.26%

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

• Basic building structure
• Standard electrical and plumbing
• HVAC systems
• Roof and exterior walls
• Foundation and floor structure

Class Life Details:

Summary

The cost segregation study resulted in significant tax savings through accelerated depreciation. The analysis identified that approximately 30.74% of the property's value could be depreciated on an accelerated schedule. The first-year accumulated depreciation increased from $5,050.52 to $300,283.85, resulting in an additional depreciation benefit of $295,233.33.