Case Study: Cost Segregation Analysis for a Retail Building in Locust Valley, NY

Narrative

In 2024, the owners of a retail standalone building in Locust Valley, NY, initiated a strategic tax planning effort through a cost segregation study. The property consists of a two-story building encompassing 2,160 square feet. Originally constructed in 1949, the retail building has undergone various improvements to maintain its functionality and appeal.

The building features a blend of traditional and modern elements, including brick exterior walls, storefront windows, and multiple electrical and mechanical systems. The interior includes retail space, a break room, restroom facilities, and various building systems such as HVAC, electrical, and plumbing components.

Objective

The primary objective of the cost segregation study was to identify and reclassify building components into appropriate tax recovery periods to optimize depreciation deductions and improve cash flow 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 Allocation: $73,059.15 

Percentage of Total Basis: 13.4%

Key components included:

• Electrical systems and outlets
• Break room equipment
• Computer and telephone connections
• Specialized lighting
• HVAC components
• Flooring and wall coverings

15-Year Class Life

Total Allocation: $11,182.53 

Percentage of Total Basis: 2.05%

Key components included:

• Concrete paving
• Site signage
• Concrete sidewalks
• Exterior improvements

39-Year Class Life

Total Allocation: $461,108.33 

Percentage of Total Basis: 84.55%

Key components included:

• Building structure
• Roof system
• Interior walls
• Basic electrical
• Plumbing systems
• HVAC distribution

Class Life Details:

Summary

The cost segregation study identified significant opportunities for accelerated depreciation. The total depreciable basis of $545,350 was strategically reallocated, with 15.45% of the assets qualifying for shorter recovery periods. This resulted in accumulated depreciation of $62,032.40 in 2024, representing an increase of $55,623.37 over conventional depreciation methods.