A Yorba Linda, California hotel that was part of a large, national brand had recently undergone a major renovation. With improvement costs totaling approximately $5.7 million, the hotel was seeking opportunities to reduce its tax burden. After consulting Capital Review Group to identify overlooked tax incentives, our team determined that the hotel was eligible for significant tax savings through Cost Segregation.
What is Cost Segregation?
Cost Segregation is an IRS-approved tax deferral strategy that allows commercial building owners to unlock accelerated depreciation deductions by simply reclassifying certain real property assets as tangible personal property. Generally, real property is depreciated over 39 years, while personal property is depreciated over 5, 7, or 15 years. Therefore, by changing the classification from real to personal property, building owners can take advantage of shorter depreciation lives and claim more substantial and immediate depreciation deductions.
Cost Segregation studies examine commercial buildings to identify real property assets that could be reclassified. These assets may include wall coverings, electrical wiring, plumbing fixtures, carpeting, and more. Any commercial buildings placed into service after December 31, 1986 may be eligible for Cost Segregation. To ensure compliance with IRS regulations and capture maximum tax savings, Cost Segregation studies should be performed by qualified third parties with tax and engineering expertise. An on-site inspection is usually required, as well as a review of lease agreements, building plans, and other records.
At Capital Review Group, our team of experts includes architects, engineers, accountants, and commercial real estate professionals, which equips us with unique capabilities to perform Cost Segregation studies. Through our analysis of the Yorba Linda hotel, we were able to capture the following tax savings: $970,839 by reclassifying real property assets as personal property with a 5-year depreciation life, $80,778 by reclassifying assets as personal property with a 7-year life, and $195,034 by reclassifying assets as personal property with a 15-year life. Therefore, the hotel saved over $1.2 million in taxes through accelerated depreciation deductions as a result of the Cost Segregation study.
If you own a commercial building, you may be eligible to reduce your tax burden and boost cash flow through Cost Segregation. Contact the specialists at Capital Review Group today to schedule a consultation!