Cost Segregation Study on a Condo in Minnesota

[Julio Gonzalez]

A cost segregation study was performed on a residential property in Duluth, MN with a depreciable cost basis of $675,000. The single-story unit encompasses 2,139 square feet and was originally constructed in 1882. The property was acquired in 2024 for investment purposes.

The property features high-end upgrades and modern finishes, including premium appliances, custom closet systems and modern electrical and mechanical systems. Renovations incorporated quality flooring materials, custom cabinetry and energy-efficient fixtures.

The aim of the cost segregation study was to reclassify eligible building components into shorter depreciation life categories, allowing the owners to accelerate depreciation deductions and improve cash flow.

An accelerated depreciation strategy helps real estate investors immediately reduce their tax liability and increase their bottom line. An engineering-based cost segregation study can also increase insurance premium savings and maximize renovations and improvements

For this property, 42.39% of the total depreciable basis was classified as 5-year class life. Assets in this category include:

• Electrical systems and lighting
• Custom closet systems
• Flooring and wall coverings
• Cabinetry and millwork
• Kitchen appliances and fixtures

The remaining 57.61% of the total depreciable basis was classified as a 39-year class life. Assets in this category include:

• Building structure
• Interior walls and ceilings
• HVAC systems
• Basic electrical
• Plumbing systems

This engineering-based cost segregation study used the following methodology:

• Physical site visit to identify and photograph property components
• A cost analysis employing engineering principles to allocate costs to specific asset classifications
• A review of construction documents, architectural plans and accounting records
• Depreciation calculation using MACRS

Reminder: bonus depreciation started to phase out in 2023. It’s 100% bonus depreciation for properties placed into service in 2017-2022, 80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026 and completely phased out in 2027. However, there are tax code changes every year.

For additional questions, check out this article on Cost Segregation FAQs.

Have you ever had a cost segregation study performed on a condo or other residential property?

[Sean Graham]

@Julio Gonzalez how are you handling the newly released audit techniques which specifically states kitchen cabinetry being 1250 real property, which is 27.5 year life?