Apartment Building Acquisition
Case Study - Apartment Complex
PROJECT OVERVIEW
A client recently acquired an apartment complex for $21M. $1.2M was allocated to land and $800,000 was allocated to furniture fixtures & equipment. The remaining $19M was allocated to the building value. The apartment complex included 256 apartments in 13 buildings spread out over 10 acres. In addition, there was a clubhouse, an outdoor pool, and parking garages. There were extensive site improvements such as asphalt paving, landscaping, fencing, sidewalks, and site lighting.
THE CHALLENGE
Multifamily residential buildings default to a 27.5-year federal tax depreciation life. However, certain components, if properly identified, may qualify for a shorter federal tax life of 5 or 15 years. Examples of the 5-year property include carpeting, laundry power & plumbing, kitchen equipment power & plumbing, built-in cabinetry, and telecommunication systems. The 15-year property category generally includes all the land improvements mentioned in the previous paragraph. A significant tax advantage can be achieved by identifying the shorter life components and segregating them from the default 27.5-year category. Unfortunately, it was not clear how to delineate between the 27.5-year components and the 5-year and 15-year components. Without a more in-depth analysis, the entire $19M building amount would have to be assigned the 27.5 year default tax life.
THE SOLUTION
The cost segregation engineers began by applying a cost model to allocate the purchase price to various trades and building components. They conducted a detailed inspection of the property, reviewed the blueprints, and interviewed key personnel. A detailed report was delivered, identifying and documenting all the components that qualify for a shorter tax life.
RESULTS ACHIEVED
By engaging the Cost Segregation team, this client was able to assign an additional $3.7M to a 5-year tax depreciation life and $1.05M to a 15-year tax depreciation life. As compared to putting the entire building value into a 27.5-year life, this strategy reduced the tax obligations over the first six years of ownership by $1.284M (deferred to future years). The net result was a present value benefit of approximately $770,000 (100% realized within the first three years of ownership).
