Case Study: Cost Segregation Analysis for an Apartment Building in San Diego, CA

Narrative

In 2023, the owners of an apartment building in San Diego California, undertook strategic tax planning to enhance their investment. The property consists of a single 2-story building encompassing 3404 square feet. Originally constructed in 1960, the apartment building features units designed to cater to a variety of tenants.

The building's exterior showcases vinyl siding and aluminum gutters. The interior is well-appointed, featuring amenities such as HVAC systems, gas water heaters, and contemporary lighting fixtures. The property also includes a wood 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 apartment building'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: $503,195.87 

Percentage of Total Depreciable Basis: 33.43%

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

• Electrical systems (outlets, wiring, panels)
• Appliances (ovens, ranges, refrigerators, washers, dryers)
• Cabinetry and countertops
• Flooring (laminate wood)
• Television and telephone connections

15-Year Class Life

Total Depreciation Allocation: $54,791.78 

Percentage of Total Depreciable Basis: 3.64%

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

• Land improvements (fencing, gates, landscaping)
• Concrete paving
• Brick retaining wall and edging

39-Year Class Life

Total Depreciation Allocation: $947,012.35 

Percentage of Total Depreciable Basis: 62.92%

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

• Structural components (walls, roof, windows, doors)
• Building systems (HVAC, plumbing, gas lines)
• Permanent fixtures (sinks, tubs, showers, toilets)
• Interior construction (drywall, ceilings, stairs)

Class Life Details:

Summary

The cost segregation study for this apartment building in San Diego, California, 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 apartment building'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 multifamily real estate investments.