Cost Segregation Study on Small Residential Condo

[Julio Gonzalez]

A cost segregation study was performed on this residential condo in Herndon, VA purchased in 2017 with a depreciable cost basis of $151,518. The condominium is 1 story and 1,333 square feet and was constructed in 2016. The condo includes high-quality granite countertops, custom cabinetry and wood floors. It includes energy efficient appliances as well as a gas fireplace in the living space.

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.

38.36% of the total depreciable basis was classified as 5-year class life. Assets identified in this study include:

• Kitchen Appliances: Refrigerator, microwave, garbage disposal, range hood and dishwasher
• Laundry Appliances: washer and dryer
• Electrical and communication systems: Specialized equipment
• Custom Cabinetry, Countertops and shelving
• Interior Finishes: wood flooring, carpet, and decorative light fixtures.

61.64% of the total depreciable basis was classified as 27.5-year class life. Assets identified in this study include:

• Bathroom Fixtures: Bathtubs, vanities, showers and toilets
• Structural Components: Drywall, wood framing and interior partitions
• Building systems: water heater, electrical distribution, HVAC, plumbing
• Interior Construction: Wood flooring, stairs, ceramic tile
• Smoke detectors

This engineering-based cost segregation study included the following methodology:

• Physical Inspection through a site visit
• Documentation review including architectural plans, accounting records and construction documents
• A cost analysis which utilizes engineering principles in order to allocate costs to their applicable asset classifications
• Calculation of the depreciation schedule using MACRS

As a reminder, bonus depreciation started to phase out in 2023. It’s 100% bonus depreciation for properties placed into service in 2017-2022, 80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026 and completely phased out in 2027. However, there are tax code changes every year. In the H.R. 3936, Built in America Act, it was proposed to extend the 100% bonus depreciation until January 1, 2027. This has the potential to be passed later this year.

For additional questions, checkout this article on Cost Segregation FAQs.

Have you had a cost segregation study performed on your condo?