Case Study: Cost Segregation Analysis for a Residential Property in West Palm Beach, Florida

Narrative

In 2024, the owner of a residential property in West Palm Beach, Florida, undertook strategic tax planning to enhance their investment. The property consists of a single two-story house originally constructed in 1930. The owner acquired the property for $355,000, with a depreciable basis of $248,500 after allocating $106,500 to land value.

The building's exterior showcases a blend of classic architectural elements, including wood siding, stucco over framing, and steel panel roofing. Large windows and sliding glass doors provide natural light throughout the structure. The interior is well-appointed, featuring amenities such as high-efficiency HVAC systems including a mini-split and a 3-ton central split system, modern bathroom fixtures, and contemporary lighting installations including recessed downlights, pendant fixtures, and accent wall sconces. The property also includes exterior improvements such as a wooden deck, concrete pavers, and a security driveway gate.

The owner 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 property's assets to optimize the owner's 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: $71,434.73 Percentage of Total Depreciable Basis: 28.75%

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

• Electrical systems (equipment panels, dedicated equipment outlets)
• Communication systems (telephone connections, television connections)
• Decorative fixtures (accent canopy lights, chandeliers, wall sconces, recessed downlights)
• Interior finishes (vinyl plank flooring, wood baseboard, horizontal blinds)
• Fixtures (ceiling fans, wood shelving, retail/office countertop)
• Interior bifold doors

15-Year Class Life

Total Depreciation Allocation: $20,323.27 Percentage of Total Depreciable Basis: 8.18%

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

• Land improvements (driveway gate, concrete pavers, wood fence)
• Site structures (timber retaining wall)
• Site utilities (aggregate paving)
• Site fixtures (mailboxes)

27.5-Year Class Life

Total Depreciation Allocation: $156,742.00 Percentage of Total Depreciable Basis: 63.08%

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

• Structural components (wood stud framing, perimeter drywall, building footings, slab on grade)
• Building envelope (stucco, wood siding, steel panel roof, wood roof construction)
• HVAC systems (mini split, central split system, ductwork)
• Plumbing fixtures (restroom water closets, vanity sinks, showers)
• Standard electrical components (general use panels, outlets, lighting)
• Interior and exterior doors and windows

Class Life Details:

Summary

The cost segregation study for this residential property in West Palm Beach, 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. The total accumulated depreciation for 2024 with cost segregation was $65,688.31, compared to only $7,153.79 without cost segregation. The total increase in depreciation was $58,534.52, providing significant tax benefits in the first year alone.

This approach not only enhanced the property'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 real estate investments even for residential rental properties.