Case Study 2: Commercial Real Estate – High Net-Worth Investor

Client Profile:

Name James Madison
Occupation Real Estate Investor
Annual Income $800,000
Property Office Building
Property Purchase Price: $5 million
Location Downtown Business District, 2023
Primary Goal Maximize tax savings and offset income from multiple investment properties

Scenario:

James purchased a Class A office building in a high-demand urban area for $5 million. With a high taxable income, he seeks ways to offset that income and reduce his overall tax liability, especially as his commercial properties are rapidly appreciating in value.

Cost Segregation Benefits:

We conducted a detailed cost segregation study and identified the following categories of assets eligible for accelerated depreciation:

  • Personal Property (Furniture, Fixtures, Equipment):
    $300,000
  • Land Improvements (Parking, Landscaping, etc.):
    $500,000
  • Building (Structural components):
    $4.2 million

This breakdown allowed for significant depreciation benefits upfront.

Tax Savings Calculation

Accelerated Depreciation:

  • Personal Property:
    $300,000 / 5 years = $60,000 per year
  • Land Improvements:
    $500,000 / 15 years = $33,333 per year
  • Total Depreciation Deduction in Year 1:
    $93,333

Tax Benefit:

At a 37% tax rate, James will save $34,600 in the first year of the cost segregation study.

Conclusion:

By utilizing cost segregation, James was able to reduce his taxable income by over $90,000 in the first year, resulting in significant tax savings. This strategy also provides ongoing depreciation deductions, which will further reduce his taxable income in the following years.

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