Case Study: Cost Segregation Analysis for a Retail Strip Mall in Fulshear, Texas

Narrative

In 2024, the owners of a retail strip mall in Fulshear, Texas, undertook strategic tax planning to enhance their investment. The property consists of three single-story buildings encompassing 83,669 square feet. Originally constructed in 2021, the strip mall features 21 tenant spaces designed to accommodate various retail businesses.

The buildings showcase modern architectural elements, including durable tilt-up concrete walls and large storefront windows. The interior features high-efficiency HVAC systems, commercial water heaters, and contemporary lighting fixtures. The property also includes extensive site improvements such as parking areas, sidewalks, and landscaping.

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.

Objective

The primary objective was to identify and classify the strip mall's assets to optimize the owners' tax savings through accelerated depreciation. The total depreciable basis of $14,940,000 was analyzed to identify assets qualifying for shorter recovery periods.

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: $2,338,826.49  Percentage of Total Basis: 15.65%

Key components included:

• Specialized electrical systems
• Kitchen equipment and fixtures
• Security systems
• Communication systems
• Decorative elements

15-Year Class Life

Total Allocation: $2,195,490.44 Percentage of Total Basis: 14.7%

Key components included:

• Site improvements
• Parking areas
• Landscaping
• Exterior lighting
• Site utilities

39-Year Class Life

Total Allocation: $10,405,683.08  Percentage of Total Basis: 69.65%

Key components included:

• Building structure
• Roof system
• Basic electrical
• Plumbing systems
• HVAC systems

Class Life Details:

Summary

The cost segregation study resulted in significant tax savings through accelerated depreciation. The analysis identified 30.35% of the total depreciable basis as qualifying for shorter recovery periods (5 and 15 years), resulting in accumulated depreciation of $3,140,598.19 in the first year compared to $271,346.15 under standard depreciation – an increase of $2,869,252.04.