Cost Segregation – Rental Property or Apartment Building Study 

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    • Nov 13, 2024
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Cost segregation Apartment Study

Maximize Your Rental Property Tax Strategy

What is Cost Segregation
Cost segregation is an effective tax planning strategy that helps businesses and individuals involved in constructing, purchasing, expanding, or renovating real estate reduce their tax liabilities by accelerating depreciation deductions, which allows for the deferral of both federal and state income taxes.

Rental Property
Unlike commercial properties, which depreciate over 39 years, residential properties such as apartment buildings qualify for a shorter depreciation period of 27 ½ years. This important distinction enables property owners to optimize their tax strategy, enhancing both cash flow and overall investment returns, while improving the financial viability of their real estate projects. 

Practical Example

The following case study highlights the benefits of accelerated depreciation, demonstrating how similar advantages can be realized for apartments with complex infrastructure and renter-focused amenities, ultimately optimizing the apartment building depreciation life for tax efficiency.

Building information

○ Building Type 🡪 Apartment
○ Property Type: 🡪 Residential
○ Building Size: 🡪 35,000 SF
○ Study Scope: 🡪 New Build
○ Condition: 🡪 New
○ Filling Year: 🡪 2023
○ Date Placed in Service: 🡪 2020
○ Purchase Price less Land or Total Construction Cost: 🡪 $7,400,000
○ Tax Rate: 🡪 30%
○ Return on Investment Factor: 🡪 8%

Summary of Benefits

○ 25% Additional Tax Deductions in First Year: 🡪 $ 1,122,445.74

○ RNPV Over Remaining Life of Property: 🡪 $ 225,280.26

○ Net Present Value (NPV) Over 10 Years: 🡪 $ 284,592.38

Building Allocation After Study

  • home
    5 Year Property

    Depreciable Basis: $855,358 at 12%

  • home
    7 Year Property

    Depreciable Basis: $45,019 at 1%

  • home
    15 Year Property

    Depreciable Basis: $387,984 at 5%

  • home
    27.5 Year Property

    Depreciable Basis: $6,111,639 at 83%

  • currency_exchange
    Total

    Depreciable Basis: $7,400,000 at 100%

Sales Tax Exemptions

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