Cost Segregation for Hotel Properties
Hotels are among the most favorable property types for cost segregation studies. The extensive furniture, fixtures, and equipment (FF&E), specialized building systems, and amenity spaces create significant opportunities for accelerated depreciation. From guest room furnishings to restaurant equipment to parking facilities, hotel properties typically achieve 30-45% accelerable percentages—among the highest of any property type.
How Cost Segregation Works for Hotels
A cost segregation study for hotels identifies the extensive components that can be depreciated over 5, 7, or 15 years. Hotels have more short-life components than almost any other property type.
Engineers analyze guest rooms, common areas, restaurants, meeting spaces, back-of-house facilities, and site improvements. Each component category is valued and assigned its proper depreciation life.
The result is a detailed allocation that your accountant uses to accelerate deductions. For existing properties, a catch-up adjustment captures all missed depreciation—often generating substantial first-year deductions.
Why Hotel Owners Overpay in Taxes
Hotels contain enormous value in short-life components: guest room furnishings, bathroom fixtures, restaurant equipment, signage, parking, and specialized systems. Without a cost segregation study, all of this is depreciated over 39 years.
Consider a $15 million hotel: if 35% qualifies for acceleration, that's $5.25 million of deductions that can be taken in the first few years. The cash flow impact for hotel owners and investors is transformative.
Many hotel operators and their CPAs don't realize the magnitude of tax savings available. Cost segregation is standard practice for sophisticated hotel investors—and should be for every hotel owner.
Property Components Commonly Reclassified
Hotels typically achieve 30-45% accelerable percentages—among the highest of any property type. The extensive FF&E and guest amenities drive these exceptional results.
Timing, Retroactive Studies, and Cash Impact
For new acquisitions or construction, conducting a cost segregation study immediately is essential. The high percentage of accelerable components makes early study particularly valuable for hotels.
For existing hotels, retroactive studies often generate the largest catch-up deductions. Hotels owned for 5-10+ years may have $500,000+ in missed depreciation available for immediate recovery.
Cash impact is substantial: reduced tax liability means more capital for renovations, acquisitions, or investor distributions. Many hotel operators use cost segregation savings to fund property improvement plans.
Who Qualifies and Who Does Not
Good Candidates
- •Owners of full-service, limited-service, and extended-stay hotels
- •Independent operators and branded properties
- •Developers completing new hotel construction
- •Investors acquiring hotels via purchase or 1031 exchange
- •Operators completing renovation or PIP projects
- •Properties with cost basis of $2 million or more
May Not Benefit
- •Properties with minimal FF&E investment
- •Owners planning immediate sale (significant recapture)
- •Fully depreciated properties
- •Owners without taxable income to utilize
Common Mistakes Hotel Owners Make
Not studying renovation projects separately
Property improvement plans (PIPs) create substantial new depreciable basis. Each renovation should be analyzed for cost segregation.
Undervaluing FF&E components
Guest room furnishings, restaurant equipment, and amenities represent significant accelerable value. Proper valuation is essential.
Treating the restaurant as building structure
Restaurant equipment, seating, and finishes are largely short-life property. This is often one of the most valuable component categories.
Ignoring parking and site work
Surface parking, landscaping, and signage are 15-year property. For hotels with extensive parking, this is significant value.
Waiting until stabilization
The tax benefits of cost segregation begin immediately. Waiting for the hotel to stabilize only delays tax savings.