Let’s say you purchase a 15-unit multifamily asset for $606,000. The land is valued at $121,000, leaving a depreciable basis of $485,000 for the buildings. Without cost segregation, the owners will depreciate the buildings on a straight line basis for 39 years. This comes out to $485,000 ÷ 39 = $12,436 that can be depreciated annually.
At a 48% tax rate, this results in first-year (and every year) tax reductions of $5,969. With a cost segregation study in place, in this example, owners will be able to depreciate almost 43% of the $485,000 in an accelerated manner—in 5-year, 7-year, and 15-year buckets.
This means that depreciation is accelerated for about $208,000 of the total. This results in accelerated depreciation of $177,343 in the first five years, compared to straight line deprecation of $62,179 (5 x $12,436) without cost segregation.
At a tax rate of 48%—which I confess is high, but that’s how they structured this example—the accumulated tax savings over the first five years is over $50,000. This is for a study that cost the owners about $5,500. And the study was also tax deductible, of course.