Cost Segregation Study on Knoxville Apartment Complex

[Julio Gonzalez]

A cost segregation study was performed on this apartment building in Knoxville, TN with a depreciable cost basis of $17,323,250. The property is 4 stories and 93,542 square feet and was constructed in 1989. The property consists of 202 units. The exterior is vinyl siding and brick veneer. The interior was made up of high efficiency HVAC systems, contemporary lighting, and electric water heaters. Additionally, the property includes an outdoor swimming pool.

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.

32.8% of the total depreciable basis was classified as 5-year class life. Assets identified in this study include:

• Appliances: Dishwasher, microwave, oven, refrigerator, garbage disposals, ranges
• Interior Finishes: countertops, ceiling vans, vinyl plank flooring
• Furniture and Fixtures: shelving, built in cabinetry and decorative light fixtures, blinds, shutters
• Specialized Equipment: Electrical systems and specialized wiring, television connections
• Security and Communication Systems: alarm clock outlets

4.92% of the total depreciable basis was classified as 15-year class life. Assets identified in this study include:

• Recreational Facilities: pool and pool deck
• Site Utilities and Infrastructure: Utility connections, signage and site lighting
• Land Improvements: Sidewalks, landscaping, fences, parking spaces

62.28% of the total depreciable basis was classified as 27.5-year class life. Assets identified in this study include:

• Standard windows and doors
• Interior ceilings and walls
• Basic plumbing and electrical systems
• Building structural elements and roofing
• Basic HVAC components
• Water heaters
• Fire protection

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.

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

Have you had a cost segregation study performed on your apartment complex?