Narrative
In 2023, the owners of a single-family residential rental property in Gatlinburg, Tennessee, undertook strategic tax planning to enhance their investment. The property consists of a single 2-story building encompassing 1,817 square feet. Originally constructed in 2022, the house features amenities designed to cater to short-term rental guests.
The building's exterior showcases durable siding and large windows. The interior is well-appointed, featuring high-efficiency HVAC systems, water heaters, and contemporary lighting fixtures. The property also includes recreational facilities such as a hot tub.
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 rental property'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)
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Discover MoreAsset Allocation
5-Year Class Life
Total Depreciation Allocation: $398,859.79
Percentage of Total Depreciable Basis: 21.95%
5-year class life assets identified in this study include:
- Electrical systems (specialized equipment)
- Appliances (refrigerators, dishwashers, laundry equipment)
- Furniture and fixtures (cabinets, shelving, mirrors, counters)
- Interior finishes (flooring, ceiling fans, decorative elements)
- Recreational facilities (hot tub)
15-Year Class Life
Total Depreciation Allocation: $67,749.38 Percentage of Total Depreciable Basis: 3.73%
15-year class life assets identified in this study include:
- Land improvements (paving, fencing, landscaping)
- Exterior structures (decks, patios)
39-Year Class Life
Total Depreciation Allocation: $1,350,778.33 Percentage of Total Depreciable Basis: 74.33%
39-year class life assets identified in this study include:
- Structural components (walls, doors, windows, roofing)
- Building systems (HVAC, plumbing, electrical distribution)
- Permanent fixtures (bathroom fixtures, fireplaces)
- Interior construction (drywall, framing, insulation)
Class Life Details:
Summary
The cost segregation study for this residential rental property in Gatlinburg, Tennessee 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 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.
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