Case Study: Cost Segregation Analysis for an Assisted Living Facility In Ohio

Narrative

In 2022, the owners of an assisted living facility located in Hillard, OH embarked on a strategic path to optimize their investment through precise tax planning. Constructed in 1965, this single-story building encompasses a total area of 34,888 square feet. The building's basis is $1,704,400.00, with the total cost of the property evaluated at $2,000,000.00.

The building's structure features a combination of practical and durable materials, designed to support the needs of an assisted living environment. This includes various specialized components such as custom cabinetry, vinyl plank flooring and modern electrical systems designed for safety and efficiency. The property also includes essential amenities like walk-in freezers, commercial kitchen equipment and laundry facilities tailored to meet the needs of residents. 

To maximize the financial benefits and enhance the property's depreciation schedule, the owners collaborated with Engineered Tax Services (ETS) to conduct a thorough cost segregation analysis. This strategic move aimed to unlock significant tax savings by accelerating depreciation on eligible property components.

This case study explores the comprehensive approach taken by the owners to optimize their investment and the resulting financial and operational benefits of the cost segregation strategy.

Objective

The primary goal of the cost segregation study was to identify and classify the complex’s components, allowing the owners to maximize their tax savings. By segregating and reclassifying specific assets, ETS aimed to provide immediate and long-term financial benefits through optimized 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: $399,161.00

Percentage of Total Depreciable Basis: 23.42%

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

• Electrical systems (specialized equipment)
• Appliances
• Kitchen equipment
• Furniture and fixtures
• Removable flooring and wall treatments
• Communications and security equipment

15-Year Class Life

Total Depreciation Allocation: $94,350.61

Percentage of Total Depreciable Basis: 5.54%

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

• Fencing and railings
• Site lighting
• Landscaping
• Sidewalks and parking
• Signage

27.5-Year Class Life

Total Depreciation Allocation: $1,210,888.39

Percentage of Total Depreciable Basis: 71.04%

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

• Roofing and gutters
• HVAC and plumbing systems
• Doors and windows
• Incoming service lines
• Electrical distribution systems

Class Life Details:

Accumulated Depreciation Comparison:

Summary

The cost segregation study for this assisted living facility in Hillard, OH, highlights the substantial financial benefits achievable through strategic tax planning. By identifying and reclassifying property components into shorter depreciation life categories, the study facilitated accelerated depreciation. This reclassification allowed the property owners to maximize tax savings and enhance cashflow, which is crucial for supporting operational needs and future investments in facility improvements.