Case Study: Rental Owner Finds $2 Million in Tax Savings With Cost Segregation Study

Understanding the situation

A residential rental property owner acquired a 312-unit apartment complex and was looking for strategies to reduce an estimated tax liability of nearly $9 million.

Exploring the challenge

CLA suggested a cost segregation study, which can provide significant immediate tax benefits — and can apply to both new construction and newly acquired properties. Moreover, properties acquired or constructed in prior tax years can benefit from a “retroactive” cost segregation study to recoup overlooked depreciation.

The CLA tax team, along with CLA’s federal tax strategies team of cost segregation professionals and engineers, explored options to reduce taxable income by increasing tangible asset depreciation expenses. The team relied on available architectural blueprints, owner discussions, site inspections, and other information sources to identify assets that qualify for accelerated tax depreciation.

Following the study, the property owner received a report that included the relied-upon tax authorities supporting CLA’s reclassifications.

The cost segregation study resulted in nearly $4.5 million in immediate cash flow benefits and provided tax savings of $2.6 million on a net present value basis.

Achieving results

The CLA team identified many assets eligible for depreciation over five, seven, and 15 years versus 27.5 years for residential rental property. In this case, approximately 22% of the real estate owner’s costs were eligible for accelerated tax depreciation — and eligible property enjoyed a 100% depreciation allowance, also known as “bonus depreciation.”

The cost segregation study resulted in nearly $4.5 million in immediate cash flow benefits and provided tax savings of $2.6 million on a net present value basis.