Cost Segregation at a Glance

Education, Opportunities

Alternative Investors Mastermind Postcast

Hosted by Jack Krupey

Alternative Investors
Mastermind Postcast

Hosted by Jack Krupey

What is Cost Segregation?

A Cost Segregation Analysis allows a property owner to determine the optimal property renovation strategy to add value and receive accelerated depreciation benefits. This is a tax advantage that is passed through to JKAM investors.

Our South Carolina operating partner worked with a specialized cost segregation engineer to analyze the multifamily asset. The engineer determines which aspects of the property qualify for “lives” that are shorter than the standard 27.5-year depreciable property. Some of the depreciation benefits that usually occur over the standard 27.5 year period can be redeemed over a 5 to 15-year period. Kitchen cabinets, for example, depreciate faster than a building’s roof. Therefore, the cabinet’s depreciation rate and tax benefits are considered ‘accelerated’ as they are redeemed sooner.

What is Bonus Depreciation?

Bonus Depreciation allows 100% Capital Improvements Budget to be Expensed in Year 1 of the asset being placed in service. The Tax Cuts and Jobs Act of 2017 brought back these enhanced Bonus Depreciation benefits from the Obama administration, allowing 100% expensing for Qualified Improvement Properties. This tax incentive is set to reduce by 20% annually starting with real estate acquired after December 31, 2022. For more details, view the

IRS Frequently Asked Questions on Bonus Depreciation.

The combination of cost segregation and bonus depreciation tax strategies can provide substantial tax benefits to investors.

Greenville Case Study

Aerial view of the Greenville Apartment Complex

JKAM recently made an allocation to a 144-unit apartment complex in the desirable suburb of Greenville, SC. Built in 1984, there is significant  value-add opportunity for modernized interior and exterior renovations. The strategy is to capitalize on improving the existing operational inefficiencies while renovating the unit’s interiors, improving the common areas, and maintaining competitive rental rates. Rental rates will be increased as interior renovations are completed over 12-24 months.

Value Add + Cost Seg

This particular asset is stabilized at 94%+ occupancy. The prior owners did not complete any major renovations to the property, which now has outdated features, providing the current owner with an opportunity to renovate. These value-add renovations benefit from accelerated depreciation tax benefits.

The owner is investing an average of $8,965/unit on interior renovations over the first 24 months. The original 1984 interiors will be renovated to install modern finishes throughout, such as new countertops, appliances, and adding washer/dryers in 100% of the units. Exterior improvements include remodeling the clubhouse, painting, adding a dog park, and rebranding the community. Each of these improvements provides additional depreciable assets for accelerated tax advantages.

Greenville by the Numbers

To understand the value of cost segregation analysis, we will  establish the baseline variables for calculating depreciation:

Property Type: Apartments
Purchase Price: $13,750,000
Number of depreciable years: 27.5 Total
Depreciable Value: $11,687,500

By utilizing a combination of cost segregation and bonus depreciation, our operating partner was able to increase depreciation benefits by approximately $2.2 million in the first year and $1.7 million years 2 through 6. These substantial front-loaded tax benefits are achieved from reclassifying 34% of the total purchase price as assets that qualify for 5-year or 15-year depreciation schedules while increasing the depreciation tax advantages by approximately $3.9M over the traditional straight line depreciation method.

Depreciation Year 1 + 100% Bonus Years 2‐6 Total
Cost Segregation $864,875 $1,752,960 $3,786,750 $6,404,585
Non‐Cost Segregation $425,000 $0 $2,125,000 $2,550,000
Cost Seg Advantage $439,875 $1,752,960 $1,661,750 $3,854,585

In Conclusion

Although our Diversified Real Estate Fund provides investors with immediate diversification across all current and future fund holdings, accelerated tax advantages often have a narrow window of opportunity. JKAM is excited to continue bringing these opportunities to our growing investor network. If you’re interested in tax advantaged real estate investments please schedule a call with us today.

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