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