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Turning Renovations into Revenue: A Cost Segregation Success Story

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How we delivered $1.36M in first-year cash flow for a luxury real estate developer, accelerating depreciation and completing a comprehensive cost segregation study in just six weeks.

Client

An established real estate developer with a creative vision spent decades transforming a run-down neighborhood into the height of high-end sophistication. The shopping and dining on offer complement the unique cultural offerings, and the area has become a noted lifestyle destination.  

Challenge

The client’s most recent development effort involved the total renovation of an 11,865 SF property with a depreciable basis exceeding $5.6 million. The building would be home to two luxury retail brands, plus a new restaurant and bar, complete with a celebrity chef. Anticipation was in the air.  

Unfortunately, the final renovations coincided with the beginning of the COVID-19 pandemic. Not many customers were browsing in the fashion flagships, and very few diners were sampling the modern cuisine. The Client was looking to recoup expenses and was exploring solutions to increase cash flow during this challenging period.  

Approach

Our team began with an in-depth conversation, making sure that they understood the Client’s current needs and their long-term, post-pandemic goals. After analyzing the property in question, our team proposed a cost segregation study to maximize tax savings through accelerated depreciation and bonus depreciation.  

Cost Segregation Study and Bonus Depreciation

During the cost segregation study, engineers identified and quantified various building assets, assigning each asset a cost using IRS-approved pricing guides. These costs were then segregated into different categories according to their true depreciable asset class lives:  
 

  • 5-Year Personal Property
  • 15-Year Land Improvements 
  • 39-Year Real Property (Commercial building assets that cannot be segregated) 

By segregating eligible assets into shorter-lived categories, assets are able to be depreciated more quickly, resulting in immediate tax savings. Cost segregation does not create new deductions but accelerates them, taking advantage of the time-value of money and increasing cash flow immediately.  

Bonus depreciation permits the additional write-off of part of an asset’s value in addition to standard depreciation. Assets with class lives of 20 years or less are eligible for bonus. 

Renovations and Qualified Improvement Property

Additionally, renovations are an excellent trigger for a cost segregation study. Improvements made to the interior portion of a non-residential building may often be classified as Qualified Improvement Property, a bonus-eligible property category that amplifies first-year tax savings.  

The Client understood that a cost segregation study would provide an immediate source of cash flow while decreasing tax liability. The valuable Qualified Improvement Property would boost the results.  

Results

The EisnerAmper engineer spent a full day studying the property, identifying and quantifying each and every asset of the building to maximize tax savings. He took copious notes and hundreds of photographs, and after reviewing all available site specifications, set about assigning costs to each asset. Finally, the assets were segregated into their new categories.  

The $5.6M+ depreciable basis was broken out as follows: 

  • 5-Year Personal Property: 42.1% ($2.38M)
  • 15-Year Land Improvements: 5.9% ($330K)
  • 15-Year Qualified Improvement Property: 30.0% ($1.69M)
  • 39-Year Real Property: 22.0% ($1.24M) 

The property was placed in service in 2019, and at that time, the bonus depreciation rate was set at 100%. As such, all bonus-eligible assets – the Personal Property, the Land Improvements, and the extensive Qualified Improvement Property – could be completely written off.  

The study yielded an additional first-year cash flow of $ 1.36 million.  

The Client was pleased with the study results and especially impressed with the deep technical knowledge of the EisnerAmper engineers who performed the study.  

The personalized insights and technical knowledge of the EisnerAmper real estate team have earned the Client’s trust, and we continue to provide ongoing specialty tax incentive support.   

Choosing EisnerAmper to perform the study meant that our Client would maximize benefit while remaining in a defensible tax position. Our team worked seamlessly with the Client, making the study process easy, and the study was completed within six weeks.  

 

Cost Segregation

Cost segregation is a powerful, IRS-accepted tax-planning strategy used to accelerate depreciation deductions, producing significant tax deferrals and increasing cash flow. We can assess if you can benefit from a cost segregation study.

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