Published by AE Tax Advisors Team • 2025-05-19

Retail Shopping Center Owner Captures $520,000 in Accelerated Depreciation

The Client

The Whitmore Investment Group, a family-owned real estate partnership in Phoenix, Arizona, acquired a 52,000-square-foot retail shopping center for $6.5 million. The center housed 14 tenants including a grocery anchor, two restaurants, and various service businesses. Annual NOI was $520,000.

The Problem

The partnership's CPA was depreciating the entire property over 39 years at $133,000 per year. With $520,000 in NOI and additional K-1 income flowing to the three partners totaling $290,000, the group was paying over $185,000 combined in federal taxes annually.

Our Strategy

We performed a comprehensive cost segregation study on the shopping center. Retail centers of this size contain a massive amount of reclassifiable components. The study identified $620,000 in 5-year property (tenant-specific buildouts, electrical panels, plumbing rough-ins, interior partitions across 14 spaces), $310,000 in 7-year property (decorative facade elements, monument signage structures), and $680,000 in 15-year land improvements (parking field, curbing, storm drainage, landscaping, exterior lighting, sidewalks). Total reclassified: $1.61 million.

The Results

The $1.61 million in accelerated depreciation created a significant loss that flowed through to the three partners, eliminating their individual tax liabilities on both the shopping center income and much of their outside income. Combined Year 1 savings across the partnership reached $520,000.

Key Takeaway

Large retail shopping centers with multiple tenants offer the greatest dollar-value cost segregation opportunities because each tenant space has its own reclassifiable buildout, and site improvements on large parcels are substantial.