Cost Segregation for
The guestrooms in hotels and motels generally have glued on finishes, millwork of varying complexity, and electrical and data connections for computers, telephones and televisions. Some include wet bars and other amenities. Many extended stay and all-suites hotels now also have fully appointed kitchens in their guest rooms. Common area amenities may include guest and commercial laundry facilities, and fitness rooms. The recovery period is generally 5 years for the personal property associated with hospitality. 15-year land improvement property includes large parking areas, extensive landscaping, exterior decorative and site lighting, swimming pools, and outdoor gathering areas.
Accelerating the depreciation on 10% – 40% of the capitalized costs is typical, depending on the type of facility, number of amenities, quality of the finishes, and extent of the site improvements.
Case Study – Full Service Hotel
The subject property is a newly constructed, full service hotel, with 122 units, placed-in-service in early 2018 for $35,200,000. The building is 83,000 square feet and has four stories. The construction costs includes all furniture, fixtures and equipment.
This hotel has guest-room kitchens as well as a common area kitchen and full service bar. There is an onsite commercial laundry as well as a guest laundry. In addition, guests have access to a small market pantry, business center, and fitness center. The building is a steel and wood framed structure with Hardiplank siding, cement plaster, and stone veneer exterior walls.
The site is improved with a pool, fencing, several guest-seating areas with fireplaces, barbeque grills, ample parking, and moderate landscaping.
The Source Advisors Cost Segregation engineers were engaged to analyze the construction cost. Contractor costs, sub-contractor costs, record ledgers, vendor invoices, and architectural plans were analyzed to properly allocate constructions costs between, building property, land improvements and personal property. Indirect costs were allocated on a pro rata basis. A thorough inspection of the property was conducted. 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.
Source Advisors reclassified 15% or $5,300,000 as 15-year land improvements and 23% or $8,080,700 as 5-year tangible personal property. This leans towards the high end of the expected range and was due to the guest room kitchens, interior guest amenities, and extensive land improvements. In addition, although it was placed-in-service in early 2018, the majority of construction occurred prior to September 28, 2017. Due to the binding contract rules, it qualifies for 40% bonus depreciation under the PATH Act and not 100% bonus under the Tax Cuts and Jobs Act.