Senior housing properties face unique financial pressures—from high operational costs to the need for continual reinvestment in facilities. Fortunately, there’s a powerful tax strategy that can unlock significant cash flow for these communities: cost segregation.
Whether you’re developing, purchasing, or upgrading a senior living facility, cost segregation allows property owners to reclassify certain components of a building into shorter depreciation schedules, dramatically accelerating tax deductions. Owners can reinvest these dedcutions into patient care, staff compensation, and facility improvements—delivering both financial and operational advantages.
Why Cost Segregation Matters for Senior Living
Senior housing often involves complex buildings that include residential units, medical infrastructure, common areas, kitchens, and more. This makes them ideal candidates for cost segregation studies, as many of these components—such as lighting, flooring, cabinetry, and mechanical systems—can be depreciated over 5, 7, or 15 years instead of the standard 27.5 or 39 years.
Benefits of cost segregation for senior housing include:
- Immediate tax deductions that enhance cash flow
- 100% bonus depreciation (available for qualified assets acquired before phaseouts begin)
- Funding for capital improvements or staffing
- Reduced taxable income, boosting overall ROI
Real-World Example: Senior Living Facility Case Study
Let’s take a closer look at how one senior housing facility unlocked massive tax benefits through a cost segregation study:
Property Overview
- Type: Senior Living Facility
- Purchase Price (excluding land): $9,470,000
- Building Size: 93,058 sq. ft.
- Date Acquired: October 2020
- Tax Year Applied: 2020
- Bonus Depreciation: 100%
- Tax Rate: 40%
Results of the Cost Segregation Study:
- First-Year Tax Savings: $702,987
- Net Present Value (NPV) Over 10 Years: $538,133
- Future Value of Invested Tax Savings: $3,333,939
Total Reclassification to Shorter-Lived Assets:
- 5-Year Property: $1,477,320
- 15-Year Property: $293,570
- Remaining 27.5-Year Property: $7,699,110
This study demonstrates how shifting over $1.77 million into shorter depreciation lives enabled the owners to capture more than $700,000 in tax savings in just the first year alone—while setting the stage for millions more in long-term financial impact.
The Impact of Bonus Depreciation
Thanks to 100% bonus depreciation still available in the tax year this study was conducted (2020), the entire value of those 5- and 15-year assets was immediately deductible—a one-time opportunity that significantly enhanced cash flow. While bonus depreciation is phasing down, even partial bonus rates or normal accelerated depreciation still provide strong benefits.
Long-Term Value, Short-Term Impact
In an industry where capital reinvestment and operational margins matter, accelerating depreciation frees up capital that can be redirected into:
- Facility upgrades and expansions
- Additional property acquisitions
- Enhanced patient care and staffing
Final Thoughts
For owners, developers, and investors in senior housing, cost segregation isn’t just a tax tool—it’s a strategic financial lever. By working with a qualified provider experienced in healthcare and residential care facilities, you can ensure compliance while maximizing savings.
If your senior housing property was purchased, built, or renovated in the past several years, it’s not too late to apply a cost segregation study—even retroactively with IRS Form 3115. The sooner the study is done, the sooner your property can start working harder for your bottom line.
