Revitalized Multi-Tenant Office Building Cost Segregation Study

Approach & Results

Client Profile
A CPA firm engaged McGuire Sponsel to carry out a cost segregation study for a recently purchased and renovated multi-tenant office building in Lexington, Kentucky. The client acquired the aging office building for $1.82 million and invested an additional $779,000 in comprehensive renovations, aiming to transform it into a modern, multi-tenant office space.

Process
Our Fixed Assets team was brought in to conduct a cost segregation study on both the purchased building and its subsequent renovations. The engagement commenced on March 9, 2023, nearly a year after the initial property acquisition, allowing for a comprehensive analysis of both the original structure and the extensive improvements.

Our team performed an exhaustive on-site evaluation on April 17, 2023. This meticulous inspection, combined with a thorough review of all relevant documentation, enabled our team to identify opportunities for strategic asset reclassification, optimizing the tax benefits for both the initial purchase and the renovation expenditures.

Study Results
The cost segregation study, concluded on May 11, 2023. Through our expert analysis, our Fixed Assets team achieved impressive reclassification results: For the original purchase, over 13% of the depreciable basis was reclassified from 39-year property into 5- and 15-year categories, totaling more than $208,000 in assets eligible for bonus depreciation. Even more remarkably, for the renovation expenses, over 80% of the depreciable basis was reclassified into these accelerated depreciation categories, amounting to $622,000 in eligible assets.

This strategic reclassification generated significant financial benefits. The study produced an increased first-year cash flow exceeding $302,000, surpassing the initial projection by over $98,000. Furthermore, the net present value of cash flows over the investment’s lifespan was calculated to exceed $192,000.