Case Study 1: Residential Home – High Earning Professional

Client Profile:

Name Sarah Thompson
Occupation Surgeon
Annual Income $450,000
Property 4,000 sqft Single-family Home
Property Purchase Price: $1.2 million
Location Suburban area, 2023
Primary Goal Reduce taxable income and save on taxes

Scenario:

Sarah purchased a luxury residential home for $1.2 million. As a high-income earner, she faces a high tax bracket and is looking for ways to reduce her tax burden. Sarah wants to leverage cost segregation to offset her taxable income and decrease her total tax liability.

Cost Segregation Benefits:

After performing a detailed cost segregation study, we identified several key components of her property that qualify for accelerated depreciation under the Modified Accelerated Cost Recovery System (MACRS). These components include:

  • Land Improvements:
    $150,000 (e.g., driveway, landscaping, outdoor lighting, etc.)
  • Personal Property:
    $120,000 (e.g., appliances, flooring, cabinetry, etc.)
  • Building Components:
    $930,000 (structural components like the foundation, roof, walls, etc.)

By breaking down the property into these categories, Sarah can depreciate the personal property and land improvements over a much shorter period (5 to 15 years) compared to the standard 27.5-year depreciation for the building itself.

Tax Savings Calculation

Accelerated Depreciation:

  • Personal Property:
    $120,000 / 5 years = $24,000 per year
  • Land Improvements:
    $150,000 / 15 years = $10,000 per year
  • Total Depreciation Deduction in Year 1:
    $34,000

Tax Benefit:

At a 37% tax rate, Sarah will save approximately $12,580 in her first year alone by using cost segregation.

Conclusion:

By conducting a cost segregation study, Sarah was able to significantly reduce her taxable income and save a substantial amount in taxes. This strategy will continue to benefit her for years to come, as she’ll continue to receive tax savings from depreciation in future years.

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