Cost Segregation Analysis for an Apartment Building in Sacramento, CA

Narrative

In 2024, the owners of a two-story apartment building in Sacramento, California, comprising 8,795 square feet with 12 units, undertook strategic tax planning to enhance their investment's financial performance. Originally constructed in 1958, the building features a durable stucco exterior finish and large vinyl windows. The well-appointed interior includes high-efficiency HVAC systems, water heaters, and contemporary lighting fixtures. Recreational amenities include a pool and pool deck area.

To optimize their tax position, the owners engaged Engineered Tax Services (ETS) to conduct a comprehensive cost segregation study. This analysis aimed to identify and reclassify the property's components into shorter depreciation life categories, enabling accelerated depreciation and maximizing tax savings.

Objective

The primary objective was to segregate the apartment building's assets and reclassify them into the appropriate depreciation classes per IRS guidelines. By reallocating assets to shorter recovery periods, ETS sought to provide immediate and long-term tax benefits through accelerated depreciation deductions.

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: $706,292.24 

Percentage of Total Depreciable Basis: 40.91%

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

• Electrical systems
• Appliances
• Furniture/Fixtures
• Interior finishes
• Communication/Security systems

15-Year Class Life

Total Depreciation Allocation: $93,103.99 

Percentage of Total Depreciable Basis: 5.39%

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

• Land Improvements (parking, landscaping)
• Recreational Facilities
• Site Utilities

27.5-Year Class Life

Total Depreciation Allocation: $927,003.77 

Percentage of Total Depreciable Basis: 53.7%

27-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, emergency lighting, signage)
• Interior construction (drywall partitions, flooring, ceilings)

Class Life Details:

Summary

The comprehensive cost segregation study for this Sacramento apartment building demonstrates the substantial financial benefits of strategic tax planning. By reclassifying property components into shorter recovery periods, ETS enabled accelerated depreciation deductions, resulting in significant tax savings and improved cash flow for the owners. This approach optimized the property's profitability while allowing for more efficient capital management and future upgrades.