Case Study: Cost Segregation Analysis for a Self-Storage Facility in Anchorage, AK

Narrative

In 2023, the owners of a self-storage facility in Anchorage, AK, decided to optimize their tax strategy to enhance the financial performance of their investment. This facility, constructed in 1980, comprises 17 single-story metal buildings designed for self-storage purposes. Recognizing the potential for significant tax savings, the owners engaged Engineered Tax Services (ETS) to conduct a comprehensive cost segregation study.

The facility was in very good condition at the time of the study, with substantial personal property components identified for accelerated depreciation. The objective was to segregate costs associated with the property into the most advantageous depreciation schedules as allowed by the IRS

Objective

The main objective of the cost segregation study was to identify and properly classify the self storage facility's assets into appropriate tax depreciation categories. By accelerating depreciation on qualifying assets, ETS sought to provide the owners with substantial tax benefits in the early years of ownership.

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 Depreciation Allocation: $37,254.87

Percentage of Total Depreciable Basis: 0.79%

5-year class life assets identified in this study include:

• Electrical systems
• Plumbing components
• Carpet and laminate flooring
• Computer and security equipment

7-Year Class Life

Total Depreciation Allocation: $885,048.88

Percentage of Total Depreciable Basis: 18.68%

15-year class life assets identified in this study include:

• Storage containers
• Electrical panels and service
• HVAC units

39-Year Class Life

Total Depreciation Allocation: $2,676,004.28 

Percentage of Total Depreciable Basis: 56.49%

39-year class life assets identified in this study include:

• Building structural components (portion allocated to the main building)
• Interior framing
• Certain electrical and plumbing components

Class Life Details:

15-Year Class Life

Total Depreciation Allocation: $1,138,404.14

Percentage of Total Depreciable Basis: 24.03%

15-year class life assets identified in this study include:

• Asphalt paving
• Fencing
• Monument sign

Summary

The cost segregation study of this self storage facility allowed the owners to reclassify a significant portion of the building's components into shorter depreciation categories. This resulted in a significant reduction in tax liability for the 2023 tax year. By accelerating depreciation, the owners were able to increase cash flow and enhance the overall financial performance of their investment.