Cost Segregation Study on STR in California

[Julio Gonzalez]

A cost segregation study was performed on this residential property in Encinitas, CA with a depreciable cost basis of $2,375,000. The property is two stories and was constructed in 2013. It was acquired in 2024 for the purpose of a short-term rental. The property consists of multiple tankless water heaters, high-efficiency HVAC systems as well as contemporary light fixtures. The home has high-end finishes within the bathrooms, bedrooms, kitchen and outdoor living spaces.

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.

24.72% of the total depreciable basis was classified as 5-year class life. Assets identified in this study include:

• Communication systems
• Built-in furniture and cabinetry
• Fixtures and electrical systems
• Appliances including microwaves, dishwashers and refrigerators
• Window treatments

6.59% of the total depreciable basis was classified as 15-year class life. Assets identified in this study include:

• Landscaping
• Walkways and paving
• Land improvements
• Outdoor light fixtures
• Concrete equipment pads

68.68% of the total depreciable basis was classified as 39-year class life. Assets identified in this study include:

• HVAC distribution system
• Roof systems
• Foundation
• Plumbing system
• Electrical service and distribution

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 residential investment property?