Hotels and Cost Segregation Case Study

Hotel Owners Minimize Taxes Through Cost Segregation and Build a Legacy of Future Wealth

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Using cost segregation, the aging owners of a hotel saved $700,000 in taxes. They invested the savings in an estate plan which included life insurance, generating a tax-free death benefit of over $2.2 million for their kids. Thanks to the cost segregation study, the owners were ultimately able to ensure that the hotel had enough liquidity to stay in their family for generations.

Case Study for Cost Segregation

The owners of an East Coast hotel had some choices to make. As they grew older and approached retirement, they saw the hotel growing and prospering, and the ability to funnel cash back into the hotel—as well as generate some real income—was still there. However, there was also a good friend knocking at the proverbial door: the IRS. The IRS, of course, wanted their piece of the success. The hotel and its owners wanted to share—just not the amount that the IRS was asking for.

Tax Burden Challenges for the Hotel

• Continuing to provide the best rooms and amenities in their segment of the hotel market.
•Eliminating tax burden and ensuring the short-term and long-term growth of the hotel and the personal portfolios of the owners.
•Utilizing tax opportunities through the assets that are currently owned without have to spend a huge part of excess cash on additional assets.

Solutions & Capital Discovery®

A cost segregation study on the hotel allows for traditionally 39-year property (written off over 39 years) to be reclassified to either 5-year, 7-year or 15-year property based on a detailed, engineering-based analysis of the blueprints and asset usages. Certain parts of the hotel actually can be depreciated much faster based on IRS guidelines. The IRS has issued an Audit Technique Guide (ATG) for IRS field agents and this guide spells out the process of a properly conducted cost segregation analysis. CRG follows this guide word for word. With hundreds of studies done over the years, not one has even been challenged by the IRS.

Based on the cost of the hotel and the improvements that were done, the hotel owners were able to reclassify 29% of the hotel assets to short-lived assets and saved approximately $700,000 in taxes over a 5-year period.

Utilizing these deductions enabled the owners of the hotel to sleep very well, knowing they shared with Uncle Sam, but still kept a huge portion of their money at home.

Transforming Tax Savings into a Legacy

As they planned for retirement and considered the future of the hotel, the owners decided to use their $700,000 of tax savings toward a more tax-efficient estate plan, aiming to keep the hotel in the family and removing liquidity risk. The tax savings translated into a $2,241,265 tax-free death benefit to leave for their kids. This substantial benefit was guaranteed for 43 years, creating an effective estate planning tool that endowed the hotel with enough liquidity to ensure that it could stay in the family for generations to come.

To discover tax savings opportunities for your hotel or building, contact Capital Review Group 877-666-5539.