Maximizing Tax Savings with Cost Segregation: A 6-Unit Apartment Building Case Study

[Malik Javed]

If you're a real estate investor looking to maximize your tax savings and boost cash flow, cost segregation might be your secret weapon. Here's a case study on a 6-unit apartment building that shows just how much you can save by breaking down your property into its components for faster depreciation.

Case Study: Cost Segregation Study on a 6-Unit Apartment Building

Overview: A 6-unit apartment building placed in service in July 2021 underwent a cost segregation study, significantly enhancing the property owner’s tax benefits. Through strategic reclassification of assets, the property owner was able to claim additional deductions of $215,000 in the first year alone. This case highlights the power of cost segregation in maximizing tax savings and boosting cash flow for real estate investors.

Property Details:

• Property Type: 6-Unit Apartment Building

• Building Area: 4,500 square feet

• Lot Size: 3,050 square feet

• Depreciable Basis: $1,000,000

• Placed in Service: July 2021

Results from Cost Segregation Study: The study identified various components within the property that qualified for accelerated depreciation, leading to substantial deductions in the first year. These deductions were crucial in offsetting the property owner's taxable income, effectively reducing their tax liability.

Key Benefits:

1. First-Year Additional Deductions: The cost segregation study enabled the property owner to claim an extra $215,000 in deductions during the first year. These deductions significantly reduced the property’s taxable income, translating to immediate tax savings.

1. Depreciation Acceleration: The standard depreciation for residential rental property is spread over 27.5 years. However, by reclassifying certain components of the building (e.g., flooring, cabinetry, electrical systems) into 5-, 7-, and 15-year depreciation schedules, the property owner could accelerate depreciation and front-load these benefits.

1. Increased Cash Flow: By reducing tax liability through accelerated depreciation, the property owner was able to increase cash flow. This extra cash flow can be reinvested into the property, used to pay down debt, or allocated towards other investments.

How Cost Segregation Works:

Cost segregation studies break down a building's components into categories that can be depreciated over shorter periods. For example, parts of the building that are considered personal property or land improvements (e.g., landscaping, parking areas, lighting) can often be depreciated faster than the building structure itself. In this case, the reclassification resulted in a significant first-year deduction under applicable bonus depreciation rates.

Why This Matters:

For investors in multi-family properties, especially in today's real estate market, maximizing tax savings is crucial for maintaining profitability. Cost segregation allows property owners to capture these savings early, rather than waiting for them to accumulate over decades. The result is a stronger financial position and more flexibility in managing the property.

Conclusion: This case study of a 6-unit apartment building demonstrates the profound impact that a cost segregation study can have on an investor's bottom line. With $215,000 in additional deductions in the first year alone, the owner was able to significantly reduce tax liability and boost cash flow. For any real estate investor, cost segregation is a strategy worth exploring to unlock the hidden value within your property.

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