Published by AE Tax Advisors Team • 2025-06-05

Industrial Warehouse Cost Segregation Recovers $165,000 in Year 1

The Client

James Harrington, an industrial real estate investor in Indianapolis, Indiana, purchased a 28,000-square-foot industrial warehouse for $2.2 million. The building was leased to a manufacturing tenant on a triple-net basis, generating $176,000 in annual NOI. James also had $240,000 in income from other business ventures.

The Problem

The property was being depreciated over 39 years at $45,000 per year. Despite the warehouse containing significant specialized infrastructure -- including reinforced flooring, overhead crane systems, dock levelers, and heavy-duty electrical -- none of these components had been segregated. James was paying $112,000 annually in federal taxes.

Our Strategy

Our cost segregation engineers identified industrial-specific components eligible for accelerated treatment. We reclassified $195,000 into 5-year property (specialized electrical distribution, compressed air systems, dock equipment, security systems), $85,000 into 7-year property (office buildout within the warehouse), and $245,000 into 15-year land improvements (truck court paving, perimeter fencing, loading area improvements, drainage). Total reclassified: $525,000.

The Results

The accelerated depreciation eliminated James's tax liability on the warehouse income and offset a large portion of his other business income. His tax bill dropped from $112,000 to under $5,000, delivering $165,000 in total Year 1 savings. James is now analyzing cost segregation on two additional warehouse acquisitions.

Key Takeaway

Industrial warehouses contain specialized infrastructure -- crane systems, dock equipment, heavy electrical, reinforced flooring -- that is frequently overlooked in standard depreciation but qualifies for 5 and 7-year treatment under cost segregation.