Cost segregation on a newly built property is the most accurate version of this work, and it is the version most owners miss. On an acquisition, an analyst reconstructs what the components cost from photographs, records, and pricing data. On new construction, you already have the answer. The general contractor itemized it, line by line, and sent it to you every month during the build.
The IRS Cost Segregation Audit Techniques Guide treats an analysis built from actual construction costs as the most reliable methodology available. If you built the property, you can use it. This guide covers what to keep, when to do the study, and the timing rule on bonus depreciation that catches people out.
Why actual cost records change the quality of the study
Every study has to answer one question for every reclassified component: what did this cost, and how do you know? On an acquisition, the honest answer involves estimation, and the defensibility of the study rests on how well that estimation is documented.
On new construction, the answer is a line item on a schedule of values. The site lighting was $34,800 because that is what the electrical subcontractor billed. The parking lot was $91,200 because that is what the paving contractor billed. There is no estimate to defend, only an allocation to explain.
That has two effects. The reclassification percentage tends to come in higher, because an analyst working from real cost detail finds components that get folded into the building on an estimated study. And the audit exposure is lower, because each number traces to a contractor invoice rather than a pricing model.
What to keep, and what it is worth
Ask your general contractor for these before final payment, while everyone is still motivated to be helpful. Getting them two years later is much harder.
- The schedule of values. The AIA G703 continuation sheet, or its equivalent. This is the single most valuable document, because it breaks the contract price into trade-level line items.
- All pay applications. AIA G702 forms across the life of the job, showing what was billed and when.
- Every change order. These often contain the highest-value short-life items, because upgrades and additions tend to be finishes, fixtures, and equipment rather than structure.
- Subcontractor bids and invoices. Especially electrical, plumbing, mechanical, paving, landscaping, and low-voltage. Trade-level detail is where the 5-year property lives.
- The final as-built plans and specifications. Including the site plan and civil drawings, which document land improvements.
- The soft cost ledger. Architect and engineering fees, permits, impact fees, the contractor's fee and general conditions, and capitalized construction-period interest.
Soft costs are not a rounding error. Architectural fees, permits, the GC fee, and general conditions can run 15% to 25% of a project, and they are generally allocated across the asset classes in proportion to the hard costs they supported. If 30% of your hard costs land in 5, 7, and 15-year property, roughly 30% of the soft costs follow them into those classes. A study that ignores soft cost allocation leaves a meaningful deduction on the table.
The placed-in-service date is what starts the clock
Depreciation begins when the property is placed in service, which means ready and available for its intended use. Not when construction finishes, not when you close the construction loan, and not necessarily when the certificate of occupancy is issued, though a CO is good evidence.
For a rental, ready and available generally means the unit is complete and actually on the market. A finished building sitting empty because you have not started advertising is a weaker position than a finished building listed for rent.
This matters because it determines the tax year the study lands in, and because a phased project can place buildings in service in different years. On a multi-building project, each building has its own placed-in-service date and its own depreciation start.
The bonus depreciation timing rule to check with your CPA
The One Big Beautiful Bill Act made 100% bonus depreciation permanent for property acquired after January 19, 2025. Property acquired on or before that date follows the older phase-down: 40% for 2025 and 20% for 2026.
For a purchased property, "acquired" is straightforward. For something you built yourself, it is not. Under the bonus depreciation rules for self-constructed property, the acquisition date is generally treated as the date physical work of a significant nature began, not the date the building was completed or placed in service. There is also a safe harbor that looks at when more than 10% of the total cost had been incurred.
The practical consequence: a building you finished in 2026 can be subject to the older phase-down rates if significant physical work started before January 20, 2025. Preliminary activities such as planning, designing, securing financing, and obtaining permits generally do not count as physical work of a significant nature, but site clearing and excavation can.
This is a fact-specific determination and it can swing the year-one deduction by a large multiple. Have your CPA pin down the start date before you assume a rate.
What tends to reclassify on a new build
The categories are the same as any study. What differs is that you can see them on the schedule of values instead of inferring them.
5 and 7-year property
- Appliances, and all equipment installed as part of the fit-out
- Cabinetry, countertops, millwork, and casework
- Carpet, vinyl plank, and other removable floor coverings
- Decorative lighting and specialty fixtures
- Window treatments and blinds
- Dedicated electrical and plumbing serving specific equipment, which the electrical and plumbing bids usually itemize directly
- Low-voltage, data, and communications cabling
15-year land improvements
- Site clearing, grading, and excavation attributable to land improvements rather than the building pad
- Paving, curbing, striping, sidewalks, and driveways
- Site utilities from the street to the building
- Storm drainage, catch basins, and detention
- Site lighting on separate circuits
- Landscaping, irrigation, fencing, and retaining walls
- Signage and mailbox structures
The civil and sitework line items on a new build are unusually easy to classify correctly, because the site contractor billed them separately from the building. On an acquisition study these same costs are buried inside a single purchase price and have to be estimated.
Do the study in the year you place it in service
There is no deadline that forecloses a study later. A look-back study on a building you completed years ago still works, and your CPA can claim the missed depreciation as a catch-up on a current return.
But new construction is the one case where waiting has a real cost beyond the time value of money. Construction records go stale. Contractors dissolve, project managers move on, and the schedule of values that was sitting in a shared folder in year one is often unfindable in year five. The study you can build from complete cost records in the placed-in-service year is a better study than the one you can build from partial records later.
If you are mid-build right now, the single most useful thing you can do is ask for the schedule of values and the change order log, and put them somewhere you will find them again.
Bottom line
New construction produces the most defensible cost segregation study available, because every component traces to a contractor line item instead of an estimate. Keep the schedule of values, the pay applications, the change orders, the subcontractor bids, and the soft cost ledger. Confirm your placed-in-service date, and have your CPA verify when physical work of a significant nature began, because that date, not the completion date, generally governs which bonus depreciation rate applies.
New residential builds up to four units run through our standard process. To size one, use the free instant estimate and then submit the property. Larger and commercial new construction is scoped individually; request a scope review and we will confirm fee and timing before anything starts.