Case Study: Cost Segregation Analysis for an Office Building in West Palm Beach, FL

office building

Narrative

In 2024, the owner of an office building in West Palm Beach, Florida undertook strategic tax planning to enhance their investment. The property consists of a single-story building encompassing 3,149 square feet. Originally constructed in 1951, the office building was acquired in February 2024 with a total cost basis of $2,663,125 (including land value of $938,527).
The building features concrete block construction with stucco exterior finish and a built-up tar/gravel roof. Interior elements include modern electrical systems with dedicated equipment outlets, high-efficiency lighting fixtures, HVAC systems, and various plumbing components. The property also includes site improvements such as site stone stamped concrete, wrought iron sidewalk gates, and professional landscaping.
The owner 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 office building's assets to optimize the owner's 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, with a focus on maximizing first-year depreciation under relevant bonus depreciation rules.

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)

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Asset Allocation

5-Year Class Life

Total Depreciation Allocation: $290,135.71 Percentage of Total Depreciable Basis: 16.8%

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

  • Dedicated equipment outlets
  • Computer connections
  • Telephone connections
  • Break room fixtures
  • Floor drains
  • Television connections
  • Accent canopy lights
  • Refrigerator and appliances

15-Year Class Life

Total Depreciation Allocation: $181,441.03 Percentage of Total Depreciable Basis: 10.5%

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

  • CMU screen wall ($102,890.51)
  • Site stone stamped concrete
  • Artificial turf
  • Exterior wood deck
  • Wrought iron sidewalk gate
  • Landscape ground cover

39-Year Class Life

Total Depreciation Allocation: $275,000 Percentage of Total Depreciable Basis: 55%

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

  • Building envelope
  • Electrical systems
  • HVAC systems
  • Plumbing components
  • Fire protection
  • Interior walls and ceilings
  • Building footings and slabs

Class Life Details:

Summary

The cost segregation study for this office building in West Palm Beach, Florida demonstrates the substantial financial advantages of strategic tax planning. By reclassifying property components into shorter depreciation categories, the study enabled accelerated depreciation of approximately 27.3% of the depreciable basis from the standard 39-year to 5-year and 15-year recovery periods. This resulted in an additional first-year depreciation of $299,205.48, providing immediate tax savings and improved cash flow.

The study also established a detailed component breakdown that will facilitate future partial dispositions and replacement cost analyses. This approach not only enhanced the property's immediate financial performance but also provides ongoing tax planning opportunities through its useful life.

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