Cost segregation for hotels: Here’s what you need to know

Hotels are a unique property type, as they are the only non-residential properties that are exclusively built to house guests. Because of that, they have unique tax implications, including certain differences for accelerated depreciation and cost segregation studies. 

While built like a residence, cost segregation studies for hotels are more complex than studies done on a residential property. They can even be more complex than office and industrial buildings since they are more of a ‘living building’, with varying components to keep the business operating. 

Here are four factors that make cost segregation unique for hotels compared to other types of property:

Commercial Cost Segregation

1. Personal property components

Hotels house a large amount of personal property (i.e. non-structural assets) such as furniture, fixtures, and equipment. Personal property is eligible for a shorter depreciation period of 5 or 7 years, which can be a huge boost in tax savings for hotel owners as more depreciation expenses can be deducted earlier in the life of the property. 

Common examples of personal property found in hotels include: 

  • Furniture: Beds, dressers, desks, chairs, and other furniture in guest rooms, as well as furniture in common areas like the lobby or conference rooms.
  • Fixtures: Lighting fixtures, bathroom fixtures, and others.
  • Equipment: Kitchen equipment in the hotel’s restaurant, fitness equipment in the gym, laundry equipment, and more.
  • Carpeting and flooring: Hotels are full of carpeting and other types of removable flooring that can count as personal property.
  • Window treatments: Curtains, blinds, and other window treatments are abundant in hotels.
  • Decorative items: Artwork, mirrors, decorative lighting, and similar items that add ambiance to the hotel.
  • Electronic equipment: Televisions, computers, printers, and other electronic equipment that are offered to hotel guests. 

Specialized systems: Security and fire alarm and suppression systems can also count as personal property.

Commercial Cost Segregation Studies

2. Land improvements 

Most hotels have substantial land improvements such as parking lots, landscaping, and swimming pools. These improvements can be depreciated over a 15-year lifespan, which while not as fast as personal property, is still better for upfront tax savings than the standard 39-year depreciation period. 

Here are some common examples of costs that can be counted as land improvements for hotels, all of which should be eligible for 15-year depreciation:

  • Parking Lots: Constructing or resurfacing a hotel parking lot.
  • Landscaping: Landscaping and associated improvements, such as irrigation systems, retaining walls, or decorative fountains.
  • Sidewalks: Installing or replacing sidewalks.
  • Fencing: Installing or replacing fencing.
  • Swimming pools: Constructing or replacing a swimming pool.
  • Outdoor lighting: Installing or replacing outdoor lighting.
  • Signage: Installing or replacing outdoor signage.

Tennis courts, golf courses, and other recreational facilities: Constructing or replacing these types of recreational facilities.

Commercial Cost Segregation

3. Specialized facilities

Hotels are often full of specialized facilities like restaurants, spas, bars, conference rooms, and gyms. During cost segregation, these are almost like their own cost segregation study within the larger study, as they each have abundant personal property that can be identified and potentially made eligible for 5 or 7-year depreciation. This adds up to another large source of tax savings during a cost segregation study. 

Examples of specialized facilities that contain eligible personal property include:

  • Restaurants and bars: Commercial kitchen equipment, bar fixtures, and specialized lighting or sound systems.
  • Fitness centers: Gym equipment, specialized flooring, mirrors, and lighting.
  • Spas: Massage tables, hot tubs, saunas, specialized lighting, and other spa equipment.
  • Conference Rooms: Audio-visual equipment, specialized lighting, movable partitions, and other equipment.
  • Laundry facilities: Commercial washers and dryers, folding tables, and other laundry equipment.

Business centers: Computers, printers, desks, chairs, and other office equipment.

4. Frequent renovations

Hotels require frequent renovations, as new guests come through and heavily use personal property and structural components and quickly wear them out. Also, having nicer and newer facilities helps hotels stay competitive and draw more business. These renovations can provide additional opportunities for cost segregation studies to reveal assets for accelerated depreciation. 

If a hotel undergoes a significant renovation, it can be a good time to do a cost segregation study, even if one was already done. The renovated assets are likely to yield a lot of additional tax from costs that are eligible for accelerated depreciation. Additionally, if existing assets were removed or replaced during renovation, there may be the option to write off the remaining depreciation value of those assets, for even more tax savings. This is something you’ll need to discuss with your CPA. 

How to get your restaurant’s cost segregation study done faster

Cost segregation is particularly lucrative for hotels, but it doesn’t require a team of expensive engineers and multiple CPAs to complete. Working with your CPA, you can leverage Commercial Property Refund to speed up the process and get a higher ROI on your cost segregation study. 

That’s because we’ve developed proprietary software that automates much of the process, eliminates the need for engineers, and reduces the cost for your CPA to complete the study.

Want to know how much hotel cost segregation could reduce your tax bill?

Check out our free Commercial Property Refund Calculator to estimate how much you can save on your next return.

About Author

Richard Bourgault

Graduating from Georgia Tech with a degree in Electrical Engineering, Richard has gained over a decade of expereince in Cost Segregation coupled with software UX.

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