Cost Segregation - Tax Depreciation Studies, and Their Use in Adult
Assisted Living Industry.

COST SEGREGATION - INTRODUCTION

The principle goal of a cost segregation study is to increase cash flow from constructed buildings, purchased properties and renovations by accelerating property depreciation and acquiring expenses.

Through this analysis, the components of a building are reclassified into proper class “lives” according to government legislation, case law, and IRS revenue rulings/ procedures. Substantial tax savings can be achieved by accelerating depreciation deductions.

The benefit of a cost segregation study lies in the timing of tax payments. Assuming a 35% Federal tax rate, an 8% discount rate, half-year convention, and no bonus depreciation, for every $1,000,000 of property reclassified from 39 years has a cumulative present value of tax deferral equaling approximately:

• $195,000 for 5-Year Class Property

• $178,000 for 7-Year Class Property

• $108,000 for 15-Year Class Property

In other words, the benefit is approximately $.19 for every dollar reclassified as five year class property from thirty-nine year class property.

 

COST SEGREGATION AND ADULT ASSISTED LIVING FACILITIES - A CLOSER LOOK

Of special importance to the assisted living industry is the landmark Hospital Corp. of America case that reinstated component deprecation for medical related facilities and other commercial properties.

The class life properties involved in the HCA medical facility case included such components as resilient/carpet flooring, wallpaper, process related equipment and their electrical hookups including medical equipment, kitchen equipment, nurse call and patient monitoring systems, and special interior finishings related to patient living areas.

Additional cases and IRS revenue rulings have added moveable interior drywall partitions, communication systems, special interior lighting, and land improvements including property drainage, paving, sidewalks, and landscaping.

Based on our past experience with assisted living facilities, an average property should yield between 25% to 35% of reclassified property to total property value.

Below are a few common benefits resulting from a cost segregation study:

• Rapid deprecation of current assets.

• Improved cash flow in first years of ownership.

• Possible lower insurance rates and local property tax rates.

• Proper classification of new assets after major facility expansion.

Adult care facility owners should be aware of the value and benefits of a study for their property portfolio and should seek advice from accounting professionals and engineering firms that have experience with cost segregation studies.