Case Study: Cost Segregation Analysis for an Apartment Building in Sun Prairie, WI

Narrative

In 2021, the owners of a two-story apartment building in Sun Prairie, Wisconsin, undertook a strategic tax planning initiative to enhance their investment returns. The property, originally constructed in 1994, consists of a single building with multiple residential units.

The building features a blend of modern amenities including high-efficiency HVAC systems, electrical systems, and various tenant comfort features. The property includes both interior and exterior improvements such as brick veneer exterior, ceramic tile flooring, and comprehensive kitchen and bathroom fixtures.

The owners engaged Engineered Tax Services (ETS) to perform a comprehensive cost segregation study of the property. The study aimed to identify and reclassify specific assets to enable accelerated depreciation and optimize tax benefits.

Objective

The primary objective of the cost segregation study was to identify and classify the apartment'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 Allocation: $101,677.75 Percentage of Basis: 29.02%

Key components included:

• Kitchen appliances (ranges, refrigerators, dishwashers)
• Electrical systems and fixtures
• Cabinet and countertop installations
• Flooring and window treatments
• Communication and security systems

15-Year Class Life

Total Allocation: $20,023.52 Percentage of Basis: 5.71%

Key components included:

• Concrete paving
• Brick pavers
• Site improvements
• Exterior landscaping

27.5-Year Class Life

Total Allocation: $228,676.72 Percentage of Basis: 65.27%

Key components included:

• Building structure and shell
• Basic electrical and plumbing systems
• HVAC systems
• Interior walls and finishes

Class Life Details:

Summary

The cost segregation study identified significant opportunities for accelerated depreciation. The analysis resulted in reclassifying approximately 34.73% of the total depreciable basis into shorter recovery periods. This reclassification generated accumulated depreciation of $154,616.88 through 2024, compared to $50,433.20 without cost segregation, resulting in an increase of $104,183.68 in accumulated depreciation.