Narrative
In 2023, the owners of a standalone retail building in Montebello, CA engaged in strategic tax planning to optimize their investment. The single-story building, originally constructed in 1953, encompasses 7,810 square feet.
The building features a blend of architectural elements, including a durable stucco exterior finish and large storefront windows. Interior finishes include acoustic ceilings, drywall partitions, commercial carpet, and VCT flooring. The property is equipped with high-efficiency rooftop HVAC units, a gas-fired water heater, and contemporary lighting fixtures.
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 retail building'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)
Learn More About Cost Segregation
Explore the benefits of cost segregation and how it can enhance your property's profitability. Dive deeper into our strategies.
Discover MoreAsset Allocation
5-Year Class Life
Total Depreciation Allocation: $201,220.16
Percentage of Total Depreciable Basis: 19.46%
5-year class life assets identified in this study include:
- Electrical systems (specialized equipment outlets, power pole feeds)
- Finishes (wood baseboard, crown molding, wood panel wallcovering)
- Security systems (folding security gate, window security bars, cameras)
- Computer and telephone connections
- Specialty flooring (commercial carpet, VCT)
15-Year Class Life
Total Depreciation Allocation: $7,597.29
Percentage of Total Depreciable Basis: 0.73%
15-year class life assets identified in this study include:
- Exterior terrazzo flooring
- Concrete sidewalks
39-Year Class Life
Total Depreciation Allocation: $825,006.55
Percentage of Total Depreciable Basis: 79.8%
39-year class life assets identified in this study include:
- Structural components (wood roof construction, wood stud framing, TPO roofing)
- Building systems (HVAC, plumbing, electrical panels and wiring)
- Permanent fixtures (restroom fixtures, water heater, lighting)
- Interior construction (drywall, acoustic ceilings, wood doors)
Class Life Details:
Summary
The cost segregation study for this retail building in Montebello, CA 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 retail 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.
Unlock Your Tax Savings
Discover how cost segregation can maximize your tax benefits and improve cash flow. Get started today with a free consultation.
Get Your Free Consultation