For a building you bought, a cost segregation engineer has to estimate what the components cost. For a building you built, nobody estimates anything. The invoices exist. That single difference is why new construction produces the most defensible study available, and why the cheapest time to engage an engineer is while the concrete is still being poured. Owners routinely wait until the following March, hand over a stack of closeout documents, and hope the detail is there. Often it is not.
Key takeaways
- New construction supports the Detailed Engineering Approach from Actual Cost Records, which the IRS Audit Techniques Guide treats as the most reliable of its six methodologies.
- The construction documents are the study. Pay applications, schedules of values, bids, change orders, and invoices are primary evidence, not estimates.
- Have your general contractor format the schedule of values before the first pay application. It costs nothing during the job and is nearly impossible after.
- Indirect and soft costs must be allocated proportionally across asset classes, not dumped into the 39-year building.
- Manufacturing and production facilities have a separate path under §168(n) that can expense the nonresidential real property portion outright.
Why Built Beats Bought, Every Time
The IRS Cost Segregation Audit Techniques Guide, Publication 5653, revised February 2025, describes six methodologies and does not treat them as equals. At the top sits the Detailed Engineering Approach from Actual Cost Records, which prices each component from the taxpayer's own accounting records. Below it, the Detailed Engineering Cost Estimate Approach, the standard where actual records do not exist. At the bottom, the rule-of-thumb approaches examiners challenge.
An acquisition study is a good study built on estimates. A new construction study is a good study built on invoices. When an examiner asks how you arrived at $214,000 for the site electrical, the answer is a subcontractor's schedule of values, not a cost index. Our summary of the IRS Audit Techniques Guide walks the 13 principal elements of a quality study, several of which get materially easier when you built the thing.
Second advantage: the engineer walks the building before the walls close. Concealed conditions, dedicated equipment feeds, and specialty plumbing runs are visible during construction and invisible afterward.
What to Capture While the Job Is Still Running
Start on day one. Your project manager already has most of this.
- AIA G702/G703 pay applications and the schedule of values, every draw, not just the final one
- Subcontractor bids and contracts, which carry more line detail than the GC's roll-up
- Change orders, with the scope narrative attached
- Invoices for owner-furnished equipment bought outside the GC contract
- The as-built drawings, including electrical panel and mechanical equipment schedules
- The soft cost ledger: A&E fees, permits, testing, construction period interest, general conditions
Tell your GC how to format the schedule of values
Most schedules of values follow CSI division, which is how construction is bid, not how depreciation works. Division 26 lumps every electrical dollar into one bucket even though some is 5-year dedicated equipment power, some is 15-year site lighting, and most is 39-year building service.
Ask for two things before the first pay application. Break line items down far enough that mixed-life categories separate: split electrical between building distribution, site and exterior, and dedicated equipment circuits, and split flooring between removable finishes and adhered tile. And keep site work separate from building work, because paving, sidewalks, site utilities, landscaping, fencing, site lighting, retaining walls, and drainage are 15-year land improvements.
A five-minute conversation at preconstruction. Our checklist of what a study requires covers the rest of the document package, and the study process itself is unchanged. Only the inputs are better.
Placed in service is a fact, and phased projects need care
A building is placed in service when it is ready and available for its intended use, which usually tracks the certificate of occupancy rather than the last punch item. On a phased project or a partial CO, portions can be placed in service in different tax years, each starting its own depreciation. Document it as it happens; reconstructing which of six buildings hit occupancy in December and which in January is a fight nobody wins two years later.
Soft Costs and Indirect Costs: Allocate, Don't Dump
Architecture and engineering fees, permits, construction period interest, general conditions, insurance, and developer overhead are real capitalized costs, and they belong to every asset class in the project, not just the shell.
The rule is proportional allocation. If 5-year property is 18.8% of direct construction cost, 18.8% of the indirect pool follows it. Dumping the whole soft cost load into the 39-year building is the most common way a new construction study leaves money on the table, and the ATG lists indirect cost treatment among the elements of a quality study.
Worked Example: A $6,800,000 Ground-Up Medical Office
Example: an $8,000,000 medical office project placed in service September 2026 Land at $1,200,000 is carved out first and never depreciates. That leaves $6,800,000 of depreciable basis: $5,600,000 of direct construction cost and $1,200,000 of indirect and soft costs.
| Class | Direct cost | Allocated indirect | Total basis | Share |
|---|---|---|---|---|
| 5-year personal property | $1,050,000 | $225,000 | $1,275,000 | 18.8% |
| 15-year land improvements | $620,000 | $132,900 | $752,900 | 11.1% |
| 39-year building | $3,930,000 | $842,100 | $4,772,100 | 70.1% |
| Total | $5,600,000 | $1,200,000 | $6,800,000 | 100% |
Short-life property totals $2,027,900, just under 30% of basis, consistent with the medical range. Both classes recover in 20 years or less, so both qualify for 100% bonus depreciation under §168(k), made permanent by OBBBA for property acquired and placed in service after January 19, 2025.
| Year-one depreciation | |
|---|---|
| Without a study, all $6,800,000 on 39 years | $50,900 |
| With the study: $2,027,900 at 100% bonus plus 39-year balance | $2,063,600 |
| Difference | $2,012,700 |
At a combined 35% rate that is roughly $704,000 of tax deferred into later years. Note that the September placed-in-service date is doing real work here: under the mid-month convention the 39-year balance contributes only $35,700 of that first-year total, so almost all of it is bonus on the short-life classes.
If You Are Building a Production Facility, Check §168(n)
The OBBBA created §168(n) qualified production property, a 100% first-year deduction for the nonresidential real property portion of a qualified production facility. That is an exception to the 39-year rule itself, not a reclassification.
It requires manufacturing, production, or refining of tangible personal property with substantial transformation. Construction must generally begin after January 19, 2025 and before January 1, 2029, with placement in service before January 1, 2031. Office, lodging, parking, sales, R&D, and software engineering space is excluded, and recapture applies if qualified use ceases within 10 years. IRS Notice 2026-16 provides the interim framework. If you are building a plant, read §168(n) qualified production property first.
A related deadline: §179D terminates for property that begins construction after June 30, 2026. Projects that broke ground on or before that date may still qualify. New starts do not.
Where New Construction Studies Get Sloppy
Capitalized interest and developer overhead are the weak point. Large fungible pools, and a study that pushes an aggressive share of them into 5-year property without a stated allocation basis is exactly what an examiner looks for. The allocation must be proportional, documented, and reconcilable.
Every allocated dollar has to tie back to a cost record. Reconciling allocated cost to actual project cost is a listed element of a quality study. If the study reports $1,275,000 of 5-year property and the cost ledger cannot be walked to that number, the number is an opinion.
A large short-life percentage is not a goal. A warehouse shell is a 10% to 18% building no matter who studies it. If a provider quotes 35% on a plain distribution box before seeing a drawing, that is marketing.
Frequently Asked Questions
When should I engage the engineer on a construction project?
At preconstruction, before the first pay application. The engineering happens after completion, but the document formatting conversation has to precede the GC's billing structure, and site observation during construction captures conditions that later get covered up.
Does a cost segregation study on new construction cost more?
Usually not, and often less per dollar of basis, because the cost detail already exists. Fees for most commercial properties run roughly $5,000 to $15,000, higher for large or complex industrial assets.
What if the general contractor will not break out the schedule of values?
Then the study falls back to the estimating approach for those line items, still an accepted methodology. You lose defensibility and precision, not the deduction. Ask early; the answer is almost always yes when asked early.
Do tenant improvements built during original construction count as QIP?
No. QIP must be placed in service after the building was first placed in service, so buildout completed as part of original construction is part of the building. Later buildouts are a different analysis, covered in renovations and tenant improvements.
See What Your Property Would Yield
Every building is different, and the only way to know your number is to look at your building. Precision Cost Segregation provides a no-cost feasibility analysis: send us the property address, purchase price, closing date, and any improvements, and we'll model your likely reclassification and first-year benefit before you commit to anything.
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This article is provided by Precision Cost Segregation for general educational purposes and does not constitute tax, legal, or accounting advice. Tax outcomes depend on your specific facts, your tax rate, your passive activity position, and your entity structure. Figures shown are illustrative. Consult your CPA or tax advisor before acting, and engage a qualified professional to perform any cost segregation study. Information is current as of publication.
This article is general information, not tax or legal advice. Depreciation outcomes depend on your facts, elections, and current law — consult your CPA before acting. © 2026 Precision Cost Segregation.