Case Study: Cost Segregation Analysis for an Assisted Living Facility in Phoenix, Arizona

Narrative

In 2023, the owners of an assisted living facility in Phoenix, Arizona sought strategic tax planning solutions to maximize their commercial real estate investment. Conducting a cost segregation analysis on their 83,493-square-foot, three-story building allowed them to leverage accelerated depreciation and optimize long-term tax benefits.

Property Overview

Originally constructed in 2015, this Phoenix-based assisted living property provides comprehensive care and amenities for its residents. Designed with both functionality and comfort in mind, the facility features:

• Modern healthcare infrastructure, including hospital-grade hand railings and nurse call stations

• Specialized medical equipment connections, ensuring quality resident care

• On-site amenities such as a commercial kitchen, laundry facilities, and communal recreation areas

• Exterior improvements like secure parking, landscaped grounds, and outdoor recreational spaces

Objective

The cost segregation study aimed to identify and classify building components into shorter depreciation life categories. By doing so, the property owners could:

• Accelerate depreciation deductions

• Reduce taxable income

• Enhance overall ROI and cash flow

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: $1,372,469.12 (23.89%)

Key Components: Electrical systems, specialized medical equipment connections, commercial kitchen appliances, security and communication systems, cabinetry, and built-in furniture.

15-Year Class Life

Total Allocation: $302,025.45 (5.26%)

Key Components: Site improvements, paving, curbing, landscaping, exterior lighting, and site utilities.

27.5-Year Class Life

Total Allocation: $4,071,422.71 (70.86%)

Key Components: Core building structure, roof system, basic electrical infrastructure, plumbing systems, and HVAC main systems.

Class Life Details:

Results

The cost segregation study identified $1,674,494.57 (29.15%) of the total basis eligible for shorter recovery periods. By employing these accelerated depreciation strategies, the property owners achieved:

• First-year tax savings due to increased depreciation deductions.

• A jump in 2023 accumulated depreciation from $78,353.42 (without cost segregation) to $1,453,034.08 (with cost segregation).

• An accumulated depreciation difference of $1,374,680.66, positively impacting their bottom line and improving cash flow.

Summary

This Phoenix assisted living facility cost segregation analysis demonstrates the power of strategic tax planning for commercial real estate owners. By carefully reallocating building components and leveraging IRS-compliant accelerated depreciation, the owners enhanced their tax benefits, improved return on investment, and set a precedent for smart financial management in the highly competitive assisted living industry.