Cost Segregation for
Assisted Living

In order to qualify for the 27.5 year tax life associated with Residential Rentals, the property must have at least 80% of the Gross Rental Income generated from the dwelling units and 50% of the dwelling units are leased on a non-transient (minimum of 30 days) basis. Most Assisted Living Facilities meet both of these test and therefore have a 27.5 year tax life.

Assisted living facilities frequently include amenities such as commercial kitchens, nurse’s stations, bathing rooms, laundry facilities, and physical therapy rooms. Individual units generally have glued on finishes and millwork of varying complexity. Many have fully appointed kitchens in each unit.

Accelerating the depreciation on 15% – 40% of the capitalized costs is typical, depending on the type of Residential Rental Property, number of amenities, quality of the finishes, and extent of the site improvements.

Cost Segregation Case Study – Assisted Living

Facts

The subject property is an assisted living facility that was acquired for $15,960,000 and placed-in–service in 2019. The property included 56 resident rooms as well as a commercial kitchen, various lounges & activity rooms, nurse’s stations, assisted bathing rooms, a physical therapy room, and administrative offices. There were also site improvements such as asphalt paving, landscaping, fencing, sidewalks, and site lighting.

The building is a two-story, wood frame structure, with vinyl siding and asphalt shingle roofs. Interior finishes such as carpeting, vinyl flooring and cabinetry are of average quality as are the kitchen appliances.

Execution

The Source Advisors Cost Segregation engineers were engaged to analyze the acquisition cost. They then applied a cost model to allocate the purchase price to various trades and building components. They conducted a thorough inspection of the property where estimates were performed. Key property personnel were also interviewed. A detailed report was delivered, identifying and documenting all of the components that qualify for a shorter tax life.

Result

Source Advisors reclassified 10% or $1,600,000 as 15-year land improvements and 18% or $2,970,000 as 5-year tangible personal property. Also, although this property is an acquisition, it qualifies for 100% bonus depreciation under the Tax Cuts and Jobs Act.