Let’s set the stage. A residential rental property owner acquired a 312-unit apartment complex and was looking for strategies to reduce an estimated tax liability of nearly $9 million.

Our tax team suggested a cost segregation study, which can provide significant immediate tax benefits — and can apply to both new construction and newly acquired properties. Moreover, properties acquired or constructed in prior tax years can benefit from a “retroactive” cost segregation study to recoup overlooked depreciation.

The CLA tax team, along with our federal tax strategies team of cost segregation professionals and engineers, explored options to reduce taxable income by increasing tangible asset depreciation expenses, relying on available architectural blueprints, owner discussions, site inspections, and other information sources to identify assets that qualify for accelerated tax depreciation.

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Following the study, the property owner received a report that included the relied-upon tax authorities supporting our reclassifications.

The cost segregation study resulted in nearly $4.5 million in immediate cash flow benefits and provided tax savings of $2.6 million on a net present value basis.

So, what was the process? Our tax team identified many assets eligible for depreciation over five, seven, and 15 years versus 27.5 years for residential rental property. In this particular case, approximately 22% of the real estate owner’s costs were eligible for accelerated tax depreciation — and eligible property enjoyed a 100% depreciation allowance, also known as “bonus depreciation.”

By understanding the situation, and exploring the challenge, the cost segregation study resulted in nearly $4.5 million in immediate cash flow benefits and provided tax savings of $2.6 million on a net present value basis.

For more information on cost segregation studies in the Northeast, contact Sean Croteau at sean.Croteau@CLAconnect.com or 978-983-9874 or please contact Erik Eggleston at erik.eggleston@claconnect.com or 646-604-0030. For more information about CliftonLarsonAllen LLP, visit CLAconnect.com.

This article originally appeared on The Patriot Ledger: Cost segregation study can provide tax benefits for property owners