Client Overview

Our client had a vision to take one of the oldest hotels and remodel it into a modern upscale lodging for those looking at a luxury getaway. After many years of abandonment, the new building boasts seven beautiful units with a large penthouse on the top floor. Each unit has a waterside balcony that overlooks the gorgeous river.

The downstairs has been transformed into a fine-dining and bar restaurant with indoor and outdoor seating. Summertime is popular, as the accessible docks make it easy for customers to park their boats and walk to the lodge. 

Project Overview

The subject property is a 7-unit luxury hotel and restaurant, completed in 2022 and valued at nearly $4 million. The complex spans more than 1.5 acres of land, with approximately 1.35 acres dedicated to the building and 0.15 acres for land improvements. Situated just feet from the bustling river, the property offers a wide array of amenities, including:

• A large pool and lounge area
• Relaxing walk path
• Docks for boat rentals or ownership
• Beautiful restaurant and bar
• Modern furnishing and kitchens in each unit
• A half-acre parking lot

The development provides an exceptional travel experience for its customers, and our client sought a way to maximize the project's financial returns by leveraging the tax benefits associated with accelerated depreciation.

The Need for a Cost Segregation Study

Upon completion of a new build, a cost segregation study helps to capitalize on immediate tax savings and improve cash flow. New construction often involves a significant investment, and a cost segregation study can help identify and allocate costs to specific property components that qualify for accelerated depreciation, such as personal property, land improvements, and certain building systems. By classifying these elements properly, the client can depreciate them over shorter periods—typically 5, 7, or 15 years—rather than the standard 27.5 or 39 years for the entire building. This results in substantial tax deductions in the early years of ownership, which can enhance the client's ability to reinvest in their business or other ventures. A cost segregation study is particularly valuable shortly after construction, as it ensures the client doesn't miss out on valuable opportunities for maximizing financial benefits from their new property. With ongoing developments and a plan to grow their real estate portfolio, this fits our client’s future goals.

Our Approach

The team at Acena conducted a thorough analysis of the property, including its various components, to identify and allocate assets with shorter depreciable lives. By identifying and reclassifying certain elements of the property as 5-year, 7-year, and 15-year property, we were able to provide substantial tax savings for our client. Our findings included:

• $300,000 classified as disposed property: With this being a remodel, items removed from the property create an immediate added benefit.
• $550,000 classified as 5-year property: This included interior finishes (appliances, trim, carpet), personal property, and specific interior elements within the apartment units such as furnishing.
• $950,000 classified as 15-year property: This included exterior land improvements such as landscaping, fences, gates, lounge pool area, river dock, and a large parking lot.
• $1,850,000 remained classified as 39-year property: The remaining portion of the property, the building structure itself, was classified under the 27.5-year depreciation schedule.

Results and Tax Savings

With our findings, we generated an estimated $1,200,000 in additional depreciation deductions for the client in 2023. This, in turn, provided an estimated $500,000 in tax savings. The final report yielded a total of $2,000,000 worth of accumulated depreciation that could be used for their 2023 taxes. Of this total, $1,600,000 represented additional depreciation that would not have been accessible without the cost segregation study.

This significant tax benefit will improve the client’s cash flow and provide them with the resources to fund future development projects.

Client Testimonial

The client’s feedback was overwhelmingly positive, reflecting the smooth and collaborative experience. As they put it:

“Randy and Acena Consulting have done a fantastic job for us on several projects.  They do a great job, at a fair price and a quick turnaround!  Would not use anyone else!”

Conclusion

this case study highlights the significant financial advantages that a cost segregation study can offer to property owners, particularly in new construction and major renovations. By correctly identifying and reclassifying various components of the property, our client could unlock substantial tax savings, which improved their cash flow and provided the capital needed for future investments. The successful application of cost segregation enhanced the client's short-term financial position and aligned with their long-term goals of expanding their real estate portfolio. 

At Acena Consulting, we remain dedicated to helping clients maximize their financial potential through expert analysis and tailored solutions, enabling them to focus on growing their businesses while we manage the complexities.

Key Takeaways

• Cost Segregation Provides Immediate Tax Benefits: The cost segregation study helped the client accelerate depreciation on specific property components, leading to significant tax savings. By classifying elements like personal property, land improvements, and specific building systems, the client could depreciate these over shorter periods (5, 7, or 15 years) instead of the standard 27.5 or 39 years, resulting in $500,000 in tax savings.
• Substantial Financial Impact on Cash Flow: The study identified $1,850,000 in additional depreciation that would not have been accessible without the cost segregation analysis. This increased depreciation translated to $2,000,000 in total depreciation deductions, providing the client with substantial cash flow to fund future development projects.
• Long-Term Value for Future Investment: By leveraging cost segregation, our client could reinvest the tax savings into growing their real estate portfolio. This strategy provided immediate financial benefits and aligned with the client’s long-term goals of expanding their business and investments.

If you’re interested in exploring how a cost segregation study can benefit your real estate investment, contact Acena today. Let us help you unlock tax savings and drive greater financial success for your next project.

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Edited by Randy Eickhoff, CPA, Founder & Head Coach at Acena Consulting. Photo courtesy of David Sawyer on Flickr.