Property Overview
This case study analyzes a Restaurant acquired in July 2019 for $2,652,877 (excluding land). The study was applied to the 2020 tax year, utilizing a 37% tax rate and an 8% present value rate of return.
With 80% bonus depreciation, the facility’s owners were able to maximize their upfront tax benefits, reducing taxable income and enhancing cash flow. The cost segregation study strategically categorized building components into shorter depreciation periods, creating significant tax savings opportunities.
| Property Type | Restaurant |
| Purchase price(less land) | $2,652,877 |
| Building sqft | 6,500 |
| Entire site sqft | 50,975 |
| Data acquired | July 2019 |
| Tax year study applied | 2020 |
| Tax rate | 37.0% |
| Present value rate of return | 8% |
| Bonus depreciation | 80% |
Building Allocation After Study
Cost Segregation Study Benefits
The cost segregation study provided significant tax savings for the hotel property, delivering an impressive $464,126 in tax savings within the first year. Over a 10-year period, the net present value (NPV) of savings reached $384,554, while the total NPV over the remaining life of the property amounted to $315,850. When reinvested, these savings equate to a future value of $5,882,790.
Additionally, the study reallocated building components into accelerated depreciation categories, with $606,846 assigned to 5-year property, $449,822 to 15-year property, and $1,349,731 to 39-year property, allowing for substantial upfront deductions and improved cash flow.
Financial Benefits Achieved
| Immediate Tax Savings | $464,126 |
| NPV Over 10 Years | $384,554 |
| NPV Over Remaining Life of Property | $315,850 |
| Future Value of Invested Savings | $5,882,790 |
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Frequently Asked Questions
What is the benefit of a cost segregation study?
A Cost Segregation study reduces a building owner’s income taxes up to $100,000 for every $1 mill in building costs. The tax savings are anywhere from 3-10% of the building cost.
What is a cost segregation study?
A cost segregation study is an engineering-based analysis that reclassifies commercial real estate components and improvements between real and personal property. This reclassification accelerates the depreciable lives from 27.5- or 39-years to 5-, 7-, or 15-years.
What real estate components can typically be accelerated through a cost segregation study?
A cost segregation study can typically accelerate depreciation on many building components, including:
- Electrical installations (e.g., dedicated computer power, special lighting)
- Plumbing systems (e.g., kitchen plumbing, bathroom fixtures)
- HVAC components
- Flooring (e.g., carpet, vinyl, tile)
- Window treatments
- Cabinetry and countertops
- Decorative finishes and millwork
- Security systems
- Fire protection systems
- Parking lot paving and lighting
- Landscaping and site improvements
- Certain building exterior components
Does my property qualify for a cost segregation study?
Your property likely qualifies if:
- It’s a commercial building or building improvements with a remaining depreciable basis
- The building or improvement cost basis is at least $200,000
- You anticipate holding the property for at least three years
When should a cost segregation study be done?
A study can be completed in the year the building or improvements are placed in service. However, it can also be done on properties acquired or constructed since 1986 without amending prior years’ tax returns.
How long does a cost segregation study take?
A cost segregation study typically takes approximately three to six weeks from the time we receive all the appropriate documentation.
What information is needed to complete a cost segregation study?
Generally, we request:
- A current tax depreciation schedule
- Building cost information
- Blueprints or architectural drawings and renovation plans, if applicable
- Access to the property for an on-site inspection and walk-through
How much can I save with a cost segregation study?
Savings vary, but within the first five years of building ownership, owners could save up to $100,000 for every $1 million in building costs.
Will a cost segregation study trigger an audit?
No, a properly conducted cost segregation study has never triggered an audit. In fact, if you are audited for any reason and the study comes into question, CSSI will defend the audit at no cost.
Can a cost segregation study be done on buildings not yet constructed?
While a full study can’t be done on unconstructed buildings, CSSI can provide estimates on tax savings from your construction budgets. A full study will be delivered when construction is complete.
