Narrative
In 2022, the owners of a farm in Texas undertook strategic tax planning to enhance their investment. The property consists of a single-story main farmhouse encompassing 2,500 square feet, along with several outbuildings and barns totaling an additional 10,000 square feet. Originally constructed in 1985, the farm features a variety of structures designed to support agricultural operations.
The main farmhouse's exterior showcases a classic rural architectural style, with a durable wood siding exterior and double-hung windows. The interior is well-appointed, featuring amenities such as a high-efficiency HVAC system, electric water heater, and traditional lighting fixtures. The property also includes a range of agricultural facilities, including a large barn with a hay loft and livestock stalls.
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 farm.
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)
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Discover MoreAsset Allocation
5-Year Class Life
Total Depreciation Allocation: $1,106,657.88
Percentage of Total Depreciable Basis: 41.92%
5-year class life assets identified in this study include:
- Commercial kitchen equipment
- Specialized laundry and dry cleaning equipment
- Dedicated electrical systems
- Security systems
- Specialized lighting fixtures
- Communication systems
15-Year Class Life
Total Depreciation Allocation: $222,323.52
Percentage of Total Depreciable Basis: 8.42%
15-year class life assets identified in this study include:
- Site improvements
- Paving and curbing
- Exterior signage
- Fencing
- Concrete sidewalks
39-Year Class Life
Total Depreciation Allocation: $1,311,018.60
Percentage of Total Depreciable Basis: 49.66%
39-year class life assets identified in this study include:
- Building structure
- Roof system
- Basic electrical
- Plumbing systems
- HVAC components
- Interior walls and finishes
Class Life Details:
Summary
The cost segregation study for this retail building in Seattle, Washington, demonstrates the substantial financial advantages of strategic tax planning. By reclassifying property components into shorter depreciation categories, the study enabled accelerated depreciation of $877,589.27 in the first year alone. The total depreciable basis of $2,640,000 was optimally allocated across 5-year, 15-year, and 39-year class lives, resulting in maximized tax savings and improved cashflow.
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