Cost Segregation: Structural Repositioning

Client Background

A high-net-worth real estate investor with a diversified portfolio of income-producing properties throughout Florida. At the time of engagement, the client’s net worth was approximately $120,000,000, with substantial income generated annually from property operations and appreciation.

The portfolio produced significant taxable income each year, resulting in an annual tax burden of approximately $6,000,000.

To mitigate this liability, the investor historically relied on cost segregation studies combined with accelerated depreciation strategies.

Prior Structure

The investor utilized cost segregation studies on newly acquired properties to accelerate depreciation.

Through engineering-based asset classification, components of the buildings were reclassified into shorter depreciable life categories such as 5-, 7-, and 15-year property, rather than the standard 27.5- or 39-year schedules.

This generated substantial early-year deductions that reduced taxable income.

As a result, cost segregation allowed the investor to reduce approximately $2,000,000 of annual tax liability during the early ownership years.

However, the remaining $4,000,000 of annual tax liability still had to be paid each year.

Structural Limitations

While cost segregation created meaningful early-year tax reductions, the strategy primarily accelerates depreciation rather than eliminating the underlying tax liability.

Accelerated depreciation reduces the tax basis of the property, which increases taxable gain when the asset is sold.

Approximately four years after implementing the strategy, the investor sold one of the properties. At the time of sale, the previously accelerated depreciation triggered depreciation recapture, resulting in approximately $2,000,000 of recaptured tax liability.

Key limitations of the strategy included:

• Depreciation deductions concentrated in early ownership years
• Remaining tax liability still paid annually
• Reduced future depreciation deductions after early acceleration
• Basis reduction increasing taxable gain upon disposition
• Depreciation recapture triggered when property is sold

The strategy improved short-term tax efficiency, but it did not address the underlying tax exposure at the structural ownership level.

Engagement

Structural Implementation

We designed and implemented a private fiduciary ownership architecture through a Legacy Preservation Trust framework.

This implementation included:

• Repositioning of the real estate portfolio within the fiduciary framework
• Alignment of portfolio income flows within the trust structure
• Structural separation between the investor’s personal estate and the underlying assets

Rather than relying on accelerated depreciation deductions tied to property schedules, the strategy addressed taxation at the ownership and income recognition level.

Within the trust framework, the portfolio’s income was structurally positioned so that the entire annual tax liability of approximately $6,000,000 could be deferred within the structure, with the deferral continuing across generational transfer.

Outcome

• Client net worth: ~$120,000,000
• Prior annual income tax liability: ~$6,000,000
• Temporary annual tax reduction from cost segregation: ~$2,000,000
• Depreciation recapture triggered upon property sale: ~$2,000,000

Following the implementation of the Legacy Preservation Trust ownership framework, the portfolio’s income was repositioned within the fiduciary structure.

As a result:

• Annual tax liability at the personal level: $0
• Annual tax liability structurally deferred within the trust: ~$6,000,000
• Tax deferral maintained within the fiduciary framework across generational transfer
• Portfolio income preserved within the long-term ownership architecture

The client transitioned from a temporary depreciation-based tax strategy to a structural framework designed to preserve capital and defer taxation across generations.