Case Study: Cost Segregation Analysis for a Single-Family Residence in Charlotte, NC

Narrative

In 2020, the owners of a residential property in Charlotte, North Carolina, undertook strategic tax planning to enhance their investment. The property consists of a single-story house originally constructed in 1955. The building displays a mix of traditional elements including brick veneer and wood framing construction.

The home features modern amenities including updated kitchen appliances such as a dishwasher, range hood, wine cooler, and a double-bowl sink. The property includes multiple bathrooms with porcelain fixtures, ceramic tile, and custom vanities. Additional features include wood flooring, ceiling fans, and a brick fireplace with mantle. The exterior showcases a wood fence, concrete sidewalks, brick pavers, and a wooden deck.

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 residential property'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:

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: $63,399.46 Percentage of Total Depreciable Basis: 23.92%

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

• Kitchen equipment (double-bowl sink, dishwasher, wine cooler, range hood)
• Bathroom fixtures (vanity sinks, wall lavatories, showers, bathtubs)
• Electrical systems (outlets, ceiling fans, lighting fixtures)
• Interior finishes (wood flooring, granite countertops, wood shelving)
• Appliances (washer, dryer, refrigerator)

15-Year Class Life

Total Depreciation Allocation: $27,975.21 Percentage of Total Depreciable Basis: 10.56%

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

• Land improvements (wood fence, concrete sidewalks, brick pavers)
• Site structures (wood shed)
• Concrete equipment pad
• Landscaping (hydroseeded lawn)

27.5-Year Class Life

Total Depreciation Allocation: $173,625.33 Percentage of Total Depreciable Basis: 65.52%

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

• Structural components (wood roof construction, building footings, brick veneer)
• Building systems (HVAC ductwork, electrical service panels)
• Interior construction (drywall ceiling, wood stud framing)
• Permanent fixtures (windows, exterior doors, restroom fixtures)
• Roofing (asphalt shingle roof)

Class Life Details:

Summary

The cost segregation study for this residential property in Charlotte, North Carolina 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.

The accumulated depreciation through 2024 without cost segregation would have been $47,780.29. With cost segregation applied, the accumulated depreciation increased to $122,679.85. The total increase of depreciation was $74,899.56, representing a significant tax benefit to the property owner.

This approach not only enhanced the property's profitability but also allowed for more efficient capital management. The case study illustrates how cost segregation can significantly boost the financial performance of residential real estate investments, even for single-family properties.