Example: Cost Segregation Study for Car Wash Facility

[Julio Gonzalez]

If a Cost Segregation Study had not been performed on this $4.4M car wash facility located in Marble Falls, Texas, it would have had first year depreciation of approximately $293,200. Thanks to the Cost Segregation Study, the property investors accelerated the depreciation that the first year depreciation was approximately $1,629,844.

Through the cost segregation study, they were able to reclassify approximately $2M to a 5 year useful life, $2.35M to a 15 year useful life.

The use of the accelerated depreciation strategy helps real estate investors to reduce the tax liability immediately which therefore increases their bottom line due to the offsetting of income. An additional benefit of a detailed engineering-based Cost Segregation Study is that it can increase potential insurance premium savings as well as provide support for the property tax appeals process. Additionally, it can help maximize renovations and improvements.

A Cost Segregation study is an IRS approved federal income tax tool that increases near term cash flow by utilizing shorter recovery periods for depreciation to accelerate return on investment. For newly constructed, purchased or renovated properties and also retroactive generally over the last 10 years, building components are properly classified into individual units of property and accurate recovery periods for computing depreciation deductions. The study identifies with forensic engineering detail the immediate Bonus Depreciation 5, 7 and 15-year personal property class lives qualifying portions of a building that are normally buried in 27.5 year residential or 39 year commercial categories.

As a reminder, bonus depreciation will start to phase out in 2023. It’s 100% bonus depreciation in 2022, 80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026 and completely phased out in 2027. If you are looking to purchase a property soon and utilize bonus depreciation, it’s important to have the property in service before 12/31/22 to take advantage of 100% bonus depreciation.