Cost Segregation Studies for HOTELS

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Cost Segregation Analyses Performed

200+
Hotel Cost Segregation
Studies
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Experience of cost segregation in all 50 states

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01

How Does Cost Segregation Analysis Work in Hotels?

    • Cost segregation in hotels is a tax planning strategy that helps hotel owners accelerate depreciation deductions
    • This engineering-based analysis identifies and quantifies building components
    • Components are then reclassified into shorter-lived tax categories, resulting in accelerated depreciation, tax deferral, and increased cash flow
    • Study can be performed on a newly constructed hotel, an acquired hotel, or a hotel undergoing renovation

02

What are the Benefits of Cost Segregation Analysis for a Hotel?

  • A cost segregation analysis of a hotel can create $100K-$400K in federal tax benefits for every $1M spent. Engineers generally accelerate 20-40% of assets in a hotel
  • “Bonus” depreciation is an additional incentive that may be claimed above and beyond accelerated depreciation  
  • A quality cost segregation analysis of hotels also provides the documentation necessary to support a host of other tax strategies, including Tangible Property Analysis, Partial Asset Dispositions, and EPAct 179D Energy-Efficiency Deductions  

03

Which Hotel Assets are Commonly Segregated?

  • Shorter-Lived 5-Year Assets May Include: 
    • Hotel Décor and Accessories – Mirrors, Signage, Etc.
    • Hotel Room Furniture
    • Kitchen equipment with specialty plumbing and electric (in extended-stay and all-suite properties)
    • Wallpaper
    • Window Treatments
    • Decorative Lighting and Millwork
    • Sound Systems
    • Paddle Fans
    • Fire Extinguishers
    • Alarm/Security Systems
    • Fitness equipment
  • Shorter-Lived 15-Year Land Improvements May Include: 
    • Extensive Landscaping
    • Paved Parking Lots
    • Sidewalks  
    • Swimming Pools and Fountains
ASCSP Certified Professionals on Staff

Hotel Cost Segregation Studies: Case Studies  

Hotel Cost Segregation Study:

Acquisition, Limited-Service Hotel

Hotel Cost Segregation Study: Acquisition

Hotel

64 guest rooms and suites in 3-story building

 

Main Lobby

Main lobby, indoor pool, fitness center, small pantry kitchen

May 2023

Placed-in-service May 2023
 

$5,111,145

Depreciable basis

Engineers Moved

3% to 5-Year

9.6% to 15-Year Land Improvements

$430,586

First Year Tax Savings

Hotel Cost Segregation Study:

Acquisition/Renovation, Limited-Service Hotel

PHASE 1

Hotel Cost Segregation Study: Acquisition/Renovation

Hotel

78 guest rooms in 3-story building 

Main Lobby

Main lobby, indoor pool, fitness center, limited-service kitchen, laundry facility

    July 2022

    Acquired and placed-in-service July 2022

     

    $8,138,080

    Depreciable basis

    Engineers Moved

    7% to 5-Year

    8% to 15-Year Land Improvements  

    $876,530

    First Year Tax Savings

    PHASE 2

    In 2023, the property underwent renovations to the roof, façade, guest rooms, and hallways. Since the Capstan engineer had already performed an initial study, it was easy to complete a follow-up study and maximize tax savings on the renovations

    December 2023

    Renovations placed-in-service December2023

    $2,610,232

    Depreciable basis

    $652,746

    First Year Tax Savings

    Hotel Cost Segregation Study:

    New Construction and Energy Study, Select-Service Hotel 

    Hotel Cost Segregation Study: New Construction and Energy Study

    Hotel

    211 units in one 13-story building

    Main lobby, fitness center, laundry facility, restaurant, kitchen-prep areas, meeting rooms, parking lot

    Energy-Efficient

    Energy-efficient features including LED lighting, additional roof and wall insulation, and “green” HVAC equipment and controls were incorporated into the building’s design

    August2023

    Placed-in-service August 2023

    $55,659,744

    Depreciable basis

    Engineers Moved

    2% to 5-Year

    1% to 15-Year Land Improvements

    4,352,708

    First Year Tax Savings

    $867,478 ($5.36/SF)

    The property also qualified for an EPAct 179D Deduction

    Cost Segregation Analyses Performed

    Cost Segregation in Hotels: FAQs  

    What is Cost Segregation in Hotels?

    The hospitality industry requires a constant influx of capital. From routine maintenance to elegant upgrades – it can feel like there’s no end to the costs incurred to keep your hotel competitive, modern, and profitable.

    Cost Segregation is a tax strategy that can provide this much-needed capital.

    Skilled engineers can analyze every asset in your hotel – down to each individual outlet. Then they’ll assign costs to each asset, and separate the assets by category. Some categories will depreciate faster than others, resulting in accelerated depreciation.

    Cost Segregation in Hotels

    What is the Impact of a Cost Segregation Study on a Hotel’s Cash Flow?  Can Cost Segregation for Hotels Drive Profitability and Increase Cash Flow for My Business?

    Hotel cost segregation results in an immediate decrease in tax liability and a commensurate increase in cash flow.  

    By performing a cost segregation study on a hotel, certain assets will be reclassified into shorter depreciation categories. This accelerates depreciation deductions – meaning you get the deductions faster – taking advantage of the time value of money. A dollar today is worth more than a dollar tomorrow – why not get that dollar today?  

    This cash can be reinvested into growing your hotel, upgrading amenities, or investing in energy-efficient systems. This will elevate the guest experience and increase guest loyalty, resulting in greater overall profitability.

    Can Cost Segregation Studies Be Performed on All Hotels?  

    Cost segregation can be performed on virtually any hotel. From a cost-effective budget motel to a vast luxury property, the large variety of acceleratable assets make nearly any hotel a solid cost segregation candidate. Successful cost segregation studies are performed for chain hotels, boutique hotels, destination resorts, and everything in between.  

    Hotels often have unique features that boost the cost seg benefit. Resort hotels may own ski lifts and ice rinks, golf courses and health spas. The multiple bars, restaurants, ballrooms, and recreation areas found in full-service hotels all contribute to a successful cost seg.

    Cost Segregation Studies on All Hotels

    When Should a Cost Segregation Study Be Performed on Hotels? 

    Cost segregation studies can be performed on hotels at any time in the property’s life cycle. Ideally, it’s best to perform a cost segregation study immediately after a hotel is placed-in-service, to maximize savings from day one. However, “look-back” studies may be performed on properties that have been in service for some time, and renovations are a great cost-seg trigger.  

    If you’re constructing a hotel from the ground-up, acquiring a new hotel, or renovating your space, a cost segregation study can put money back into your pocket, and into your business.

    Can Cost Segregation Be Applied to Hotels Already in Service?

    Yes!  Hotels that were placed-in-service in a previous tax year can be great candidates for a look-back cost segregation study. By reclassifying assets to their correct lives, taxpayers can retroactively “catch-up” on all the depreciation they would have gotten had the study been performed on day one.

    Cost Segregation Study on Hotels Already in Service

    Are there Specific Regulations or Guidelines for Cost Segregation in Hotels?  

    Hotel cost segregation studies – like all cost segregation studies – must be performed according to the IRS’ Cost Segregation Audit Techniques Guide.

    Who Can Perform a Hotel Cost Segregation Study?  

    An engineer-performed study is explicitly recommended by the IRS’ Cost Segregation Audit Techniques Guide. Only a trained engineer has the technical and tax knowledge required to complete a quality study that is both thorough and defensible.   

    That said, not all cost segregation providers are created equal. Be sure to do your homework before selecting a provider.

    What Does a Hotel Cost Segregation Study Entail?  

    The hotel cost segregation process is quite straightforward:   

    • We gather information about you and your hotel.
    • We provide a complimentary Estimate of Potential Benefits, along with a customized plan to maximize tax savings based on your needs and goals.   

    If you decide to move forward with the study:  
     

    • A Capstan engineer visits your hotel, methodically walking it and taking many notes and photos to quantify each asset.
    • The engineer will use his notes, along with client provided documents, to painstakingly assign costs to each asset.
    • The assets will then be segregated into the aforementioned categories, and the results will be evaluated by two different reviewers for tax and technical accuracy.
    • A thoroughly documented report containing spreadsheets, photos, graphical analysis, and 100+ pages of content will be delivered, along with the Capstan Warranty that promises no-cost defense in the unlikely event of an audit.
    Hotel Cost Segregation Study Entail

    How Long Does It Take to Complete a Hotel Cost Segregation Study?  

    Timing of a cost segregation study in a hotel will vary based on project complexity, but reports are generally delivered within 30 days of the site visit.

    How Much Does a Cost Segregation Analysis of Hotel Property Cost?

    The fees for cost segregation in a hotel will vary based on:   

    • Property size, type, location
    • Property history/complexity
    • What property information is readily available

    The usual return on investment for a cost segregation report is well over 10 to 1, and most taxpayers find that the fee is well outweighed by the benefit.

     

    Cost Segregation Analysis of Hotel Property Cost

    How Can I Qualify for Cost Segregation in Hotels?  

    If you own or are planning to acquire a hotel with a depreciable basis of at least $1M, you are likely to qualify for cost segregation on your hotel. If you’d like to learn more about cost segregation in hotels, please reach out. We’re here to help.

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