Case Study: Cost Segregation Analysis for a Short-Term Rental Property in Indio, California

Narrative

In 2023, the owners of a short-term rental property in Indio, California, undertook strategic tax planning to enhance their investment. The property consists of a two-story residential building encompassing 2,482 square feet. Originally constructed in 2021, this single-family home was acquired in 2023 and converted into a short-term rental property.

The building features modern amenities including a pool, spa, outdoor kitchen, and high-end finishes throughout. The property includes significant outdoor improvements such as artificial turf, concrete paving, and decorative masonry walls. Interior amenities include custom cabinetry, high-efficiency HVAC systems, and luxury fixtures designed to cater to vacation rental guests.

Objective

The primary objective of the cost segregation study was to identify and reclassify specific assets to optimize the owners' tax savings through accelerated depreciation. The total project cost basis was $900,000, with $674,998 allocated to depreciable improvements and $225,002 allocated to non-depreciable land value.

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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: $172,733.39 Percentage of Total Basis: 25.59%

Key components include:

• Kitchen appliances and fixtures
• Custom cabinetry and countertops
• Electrical systems and lighting fixtures
• HVAC components
• Security and audio/visual systems

15-Year Class Life

Total Allocation: $117,323.03 Percentage of Total Basis: 17.38%

Key components include:

• Swimming pool and spa
• Outdoor kitchen and fire pit
• Artificial turf landscaping
• Concrete paving and curbing
• Decorative fencing and gates

39-Year Class Life

Total Allocation: $384,941.58 Percentage of Total Basis: 57.03%

Key components include:

• Basic building structure
• Interior walls and doors
• Plumbing systems
• Electrical distribution
• Roofing system

Class Life Details:

Summary

The cost segregation study identified significant opportunities for accelerated depreciation. The analysis resulted in:

• First-year depreciation of $247,941.69
• Five-year cumulative depreciation of $320,736.35
• Total accumulated depreciation through 2024 of $271,096.07

This represents an increase of $240,086.55 in accumulated depreciation compared to straight-line depreciation without cost segregation, providing substantial tax savings and improved cash flow for the property owners.