An individual invested in an apartment complex in the area for $1,100,000.
Several years after the building had been placed into service, cost segregation, a method of reclassifying building assets that significantly reduced the tax burden of owners of residential real property, became accepted by the IRS.
Machen McChesney recognized and determined that the business could reap significant tax benefits by employing a cost segregation study.
By conducting a cost segregation study, Machen McChesney was able to reclassify various components of the building.
Following the cost segregation study, it was determined that $430,000 of the original construction cost was determined to be “personal property” as opposed to “real property.”
Personal property can be depreciated over a much shorter life span (five, seven or 15 years), which significantly reduces taxable income and increases real dollar cash flow by achieving a positive net present value from accelerating tax depreciation.
On the business’s income tax return, Machen McChesney was able to claim additional depreciation from the time that the building had been put into service.
The business was able to claim $250,000 in additional depreciation, which resulted in a current year tax savings of $87,500.