Narrative
In 2014, the owners of an office condo in Scottsdale, Arizona, undertook strategic tax planning to enhance their investment. The property consists of a single-story building encompassing 2,400 square feet. Originally constructed in 2007, the office condo features modern amenities designed to cater to a variety of tenants.
The building's exterior showcases contemporary architectural elements, including durable finishes and large windows. The interior is well-appointed, featuring amenities such as high-efficiency HVAC systems, water heaters, and contemporary lighting fixtures. The property also includes a range of office-specific features such as demountable partitions, specialized electrical systems, and computer and telephone connections.
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 office condo'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:
- Physical Inspection: conducting a thorough site visit to identify and photograph the property's components
- Document Review: examining architectural plans, construction documents and accounting records
- Cost Analysis: applying engineering principles to allocate costs to specific asset classifications
- Depreciation Calculation: calculating depreciation using IRS-accepted methods such as the Modified Accelerated Cost Recovery System (MACRS)
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Discover MoreAsset Allocation
5-Year Class Life
Total Depreciation Allocation: $753,826.79 Percentage of Total Depreciable Basis: 31.41%
5-year class life assets identified in this study include:
- Electrical systems (specialized equipment panels, outlets, connections)
- Appliances (refrigerators, water heaters, water coolers)
- Millwork and casework (cabinets, countertops, shelving)
- Interior finishes (flooring, ceiling fans, blinds, wall treatments)
- Office-specific items (demountable partitions, slatwall, security systems)
39-Year Class Life
Total Depreciation Allocation: $1,646,173.21 Percentage of Total Depreciable Basis: 68.59%
39-year class life assets identified in this study include:
- Structural components (walls, doors, windows, roofing)
- Building systems (HVAC, plumbing, electrical distribution)
- Permanent fixtures (restroom fixtures, lighting, ceiling systems)
- Interior construction (drywall, framing, paint, ceramic tile)
Class Life Details:
Summary
The cost segregation study for this office condo in Scottsdale, Arizona 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 office condo'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 real estate investments.
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