Data Wise - Unlocking Tax Benefits with Cost Segregation: A Hotel Construction Case Study
- Bob Montes
- May 9
- 3 min read
Introduction
Cost segregation is an effective strategy for real estate investors, particularly those with newly constructed properties. By accelerating depreciation, property owners can significantly reduce their taxable income and improve cash flow in the early years of ownership. In this case study, we’ll explore how a cost segregation study conducted for a newly constructed hotel in California enabled the owner to optimize their tax benefits, enhance financial flexibility, and improve ROI.
The Property: A Five-Story Hotel
The property in focus is a newly constructed hotel located in California. The hotel features a range of amenities designed to cater to both business and leisure travelers:
179 guest suites
1,900 square feet of meeting and conference space
Pool and 1,095-square-foot fitness center
930-square-foot dining space
Full-service bar and lounge with 1,800 square feet of interior seating
1,500 square feet of covered patio seating
24/7 in-house market
Courtyard with two barbecues and an event lawn with three fire tables
The hotel covers 128,000 square feet and was constructed with a total investment of $57.2 million. With its extensive amenities and diverse features, the hotel owner sought to maximize tax savings through a cost segregation study to accelerate depreciation and unlock immediate tax benefits.
The Methodology: A Thorough and Documented Approach
The cost segregation study was carried out using a robust, fully documented methodology that adheres to professional engineering and cost estimating procedures. The study followed IRS guidelines, ensuring compliance and maximizing depreciation benefits. Below is an overview of the methodology employed:
Auditable, Comprehensive Cost Segregation Study
Including MACRS allocations by Property Unit (PU), CSI format, and SOV format, providing an IRS-compliant, auditable structure.
Blueprint and Document Review
Civil, Architectural, Structural, MEP, and Title 24 documents, along with load calculations, were analyzed for precision.
Financial and Historical Review
Key financial and historical documents were examined to validate cost allocations and establish a defensible foundation.
Segregation of Systems and Components
Reclassification of systems like HVAC, plumbing, lighting, QIP, and site improvements into 5-, 7-, and 15-year property.
Cost Estimation and Classification
Estimated costs were categorized for real property, fixtures, and personal property. Section 263(a) repair costs and non-value-added expenses were separated.
Tax Opinion with Substantial Authority
A “substantial authority” minimum tax opinion was issued to reduce audit risk and penalty exposure.
On-Site Inspection
Conducted at substantial project completion to verify and finalize classification accuracy.
The Results: Significant Tax Savings and Enhanced Cash Flow
Location: California
Total Project Cost: $57.2 million
Building Size: 128,000 SF
Units: 179 guest suites
Financial Impact:
Total Depreciation Identified: $23.2 million (43% of project cost)
First-Year Depreciation: $17.3 million
Bonus Depreciation Applied: 60%
First-Year Cash Flow Increase: $6.7 million
This result drastically reduced the owner’s tax liability and provided significant liquidity in year one, positioning the asset for strong financial performance from the outset.
Challenges and Strategic Considerations
Given the variety of spaces and specialized amenities—from guest suites to an event lawn with fire tables—accurate classification and detailed cost breakdowns were essential. The complexity demanded meticulous documentation and expert-level review of all systems, contracts, and financials to ensure optimal outcomes while remaining compliant with IRS rules.
Key Takeaways
$6.7M in first-year cash flow gains through accelerated depreciation
43% of property cost identified for faster depreciation
Compliance and audit-readiness through documented methodology
Higher ROI and reinvestment potential through improved liquidity
About Our Study & Report
Final reports by Data Wise are fully auditable and can be shared with internal and external reporting agencies as you deem necessary. All analysis is conducted in accordance with Internal Revenue Service guidelines, ensuring full compliance when issuing cost segregation reports.
Data Wise retains all supporting documentation—both provided by the client and developed internally—as part of our official work papers. In the event of internal or external audits, we can readily access and present this information to support and defend our analysis, conclusions, and tax opinion.
Our commitment to defensible, well-documented reporting means clients can confidently use our studies as a foundation for significant tax benefit strategies—backed by engineering, accounting, and regulatory best practices.
Are you planning new construction, a property acquisition, or renovations? A cost segregation study could unlock significant tax savings and cash flow for your real estate investment.
Contact Data Wise today to schedule a free consultation and see how much your property could benefit.
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