Narrative
In 2019, the owners of a retail strip mall in St. Petersburg, Florida, undertook strategic tax planning to enhance their investment. The property consists of a single one-story building encompassing 5,011 square feet. Originally constructed in 1949, the retail strip mall features 3 tenant spaces designed to cater to a variety of businesses.
The building's exterior showcases a blend of modern and classic architectural elements, including a durable stucco finish and large aluminum-framed windows. The interior is well-appointed, featuring amenities such as high-efficiency HVAC systems, water heaters, and contemporary lighting fixtures. The property also includes ample parking space and attractive 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. 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 strip mall'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: $277,386.63
Percentage of Total Depreciable Basis: 31.26%
5-year class life assets identified in this study include:
- Electrical systems (point of sale connections, equipment panels)
- Appliances (refrigerators, microwaves, ice machines)
- Furniture and fixtures (cabinets, shelving, counters)
- Interior finishes (vinyl plank flooring, laminate wood flooring, decorative molding)
- Communication and security systems (television connections, security cameras)
15-Year Class Life
Total Depreciation Allocation: $107,677.43
Percentage of Total Depreciable Basis: 12.13%
15-year class life assets identified in this study include:
- Land improvements (asphalt paving, concrete curbs and sidewalks, fencing, landscaping)
- Site utilities and infrastructure (storm drainage, catch basins, site lighting)
39-Year Class Life
Total Depreciation Allocation: $502,335.94
Percentage of Total Depreciable Basis: 56.61%
39-year class life assets identified in this study include:
- Structural components (foundation, walls, roof framing, windows, doors)
- Building systems (HVAC, plumbing, electrical distribution, fire sprinklers)
- Permanent fixtures (restroom fixtures, water heater, emergency lighting)
- Interior construction (drywall partitions, ceiling systems)
Class Life Details:
Summary
The cost segregation study for this retail strip mall in St. Petersburg, Florida 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 strip mall'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.
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