Case Study: Cost Segregation Analysis for a Retail Building in Jacksonville, FL

Narrative

In 2024, the owners of a standalone retail property in Jacksonville, Florida undertook a strategic tax planning initiative to enhance their investment returns. The property consists of a single-story building encompassing 2,547 square feet. Originally constructed in 1930, the retail building has been well-maintained and updated over the years.

The building features a blend of traditional and modern elements, including brick exterior walls, storefront windows, and updated mechanical systems. The interior includes retail space, storage areas, restrooms, and kitchen facilities. Notable features include walk-in coolers, specialized electrical systems, and modern HVAC equipment.

Objective

The primary objective was to identify and reclassify building components into shorter depreciation periods to accelerate depreciation deductions and optimize tax benefits for the property owner. The total depreciable basis analyzed was $948,780, with a land value of $101,220.

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: $285,696.07 Percentage of Total Depreciable Basis: 30.11%

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

• Electrical systems and lighting
• Kitchen equipment and coolers
• Communications systems
• Specialized fixtures and finishes

15-Year Class Life

Total Depreciation Allocation: $9,201.59 Percentage of Total Depreciable Basis: 0.97%

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

• Site improvements
• Paving and concrete work
• Exterior lighting
• Fencing and railings

39-Year Class Life

Total Depreciation Allocation: $653,882  Percentage of Total Depreciable Basis: 68.92%

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

• Building shell and structure
• Standard electrical and plumbing
• Basic HVAC components
• Permanent walls and floors

Class Life Details:

Summary

The cost segregation study resulted in significant tax benefits:

• First-year accumulated depreciation: $209,060.01
• Substantial increase from $6,720.53 without cost segregation
• Over 31% of the total depreciable basis identified for accelerated depreciation

This analysis demonstrates how strategic tax planning through cost segregation can significantly improve cash flow and create substantial tax savings for commercial property owners.