Published by AE Tax Advisors Team • 2025-05-02

Restaurant Building Purchase Yields $92,000 in Cost Segregation Savings

The Client

Marco Delgado purchased a 4,200-square-foot standalone restaurant building in Denver, Colorado for $1.1 million. He planned to operate a family-style Italian restaurant, and the building came with an existing commercial kitchen. His projected first-year revenue was $780,000 with net income around $165,000.

The Problem

Marco's accountant intended to depreciate the entire building over 39 years, generating just $22,500 per year in depreciation. The commercial kitchen alone contained over $180,000 in specialized infrastructure -- grease traps, hood ventilation, walk-in cooler/freezer installations, and dedicated electrical -- all of which was being lumped into the 39-year structural category.

Our Strategy

Our cost segregation study separated the restaurant-specific components from the building shell. We reclassified $128,000 into 5-year property (kitchen equipment foundations, specialized electrical, plumbing for grease traps, decorative interior finishes), $54,000 into 7-year property (signage, booth installations, bar fixtures), and $98,000 into 15-year land improvements (patio, parking, exterior lighting). Total accelerated basis: $280,000.

The Results

The $280,000 in accelerated depreciation eliminated Marco's federal tax liability and generated a carryforward loss. His projected $42,000 tax bill became a $0 liability, and total savings including state tax reached $92,000. Marco used the cash flow improvement to hire two additional staff members during his critical first year.

Key Takeaway

Restaurant buildings are frequently overlooked for cost segregation, but their specialized kitchen infrastructure, dining area buildout, and site improvements make them strong candidates for accelerated depreciation.