Cost Segregation on New Construction: When Should You Start?

Why new construction is the strongest case for a study

Every cost segregation study has to answer the same question for every component of a building: what did this actually cost. On a property owned for years, an engineer answers that question by working backward from blueprints, current photos, and appraisal data, reconstructing a cost breakdown that was never itemized in the first place. On new construction, the answer is sitting in the job cost ledger already, broken out by trade: framing, electrical, plumbing, finishes, site work, and general conditions.

That difference matters because the IRS's own Audit Techniques Guide (Pub 5653) treats a study built on actual costs as the strongest form of documentation available. The reclassification itself rests on settled law; the IRS lost this argument decades ago in Hospital Corporation of America v. Commissioner (109 T.C. 21, 1997), and a proper study since then has followed the government's own playbook rather than exploiting a gap in it. New construction just gives the engineering team better source material to apply that playbook to, which is exactly why it tends to be the cleanest engagement type a study can take on.

A purchase of an existing building can still produce a strong study. But a ground-up project starts every component's clock at zero on a documented, itemized cost, instead of a cost an engineer has to estimate from what is visible today.

When to bring the engineering team in

The best time to start is before the job cost ledger closes out and gets rolled into one lump capitalized number on the balance sheet. While the general contractor's draw schedule, schedule of values, and change orders are still broken out by trade, our engineering team can tie each line item to its correct depreciation class instead of reconstructing that split later from drawings and photos alone.

That does not mean a study has to happen mid-construction, and it does not mean there is a hard deadline that expires. It can run any time after the building is placed in service. But the closer to completion the engagement starts, the more of the original itemized cost detail is still intact, easy to pull, and easy for the engineering team to tie out line by line rather than reconstruct.

Owners who are still in the planning stage sometimes ask whether to loop in the study before breaking ground. It is not necessary to do so; the classification work happens after the building exists and costs are known. What matters is keeping the job cost records organized by trade through completion, so they are ready when the engagement starts.

Site improvements: the part new construction changes the most

On a ground-up build, the site work often shows up as its own major cost category in the schedule of values: grading, paving, curbs, fencing, landscaping, exterior lighting, and storm and utility lines run to the building. All of that lands in the 15-year land improvement class, and on a new retail pad or industrial site with a full parking lot, that category alone can be a meaningful share of the total project cost. See what counts as a 15-year site improvement for the full list.

An existing-building purchase usually inherits site improvements that were built years earlier and are already partly depreciated by the time of the sale. New construction starts that clock at zero, on a full new basis, with the actual paving and landscaping contract in hand instead of an estimate reverse-engineered from a satellite photo.

What the study actually reclassifies

The same four buckets apply to a new building as to any other: 5-year property (carpet, most flooring, decorative lighting, cabinetry, appliances, window treatments, and certain electrical or plumbing serving specific equipment), 7-year property (certain fixtures and furniture), 15-year land improvements, and the 39-year (or 27.5-year residential) structural shell that never moves regardless of how the property was built. See what gets reclassified in a cost segregation study and the full 5, 7, and 15-year property examples for the complete inventory.

That office/warehouse example was a purchase, not new construction, but it shows what the same classification work produces once it is applied to real cost records. New construction gives the engineering team those records from day one instead of reconstructing them, which tends to make the classification faster and the costing more precise.

Bonus depreciation on a new build

The 5, 7, and 15-year property a study identifies is bonus-eligible under section 168(k). For qualifying property acquired, which for new construction generally lines up with the placed-in-service date, after January 19, 2025, the 2025 OBBBA law restored 100% bonus depreciation and made it permanent. That means the entire reclassified share of a new building's cost can be expensed in year one instead of spreading over 5, 7, or 15 years. See how bonus depreciation and cost segregation work together for how the eras before that date apply to a project that started earlier.

This is not a look-back

A study on new construction is a same-year classification, not a look-back. There is no Form 3115, no section 481(a) catch-up computation, because there is no missed depreciation to catch up on. The building was just placed in service and the study simply classifies it correctly from the start. Compare that to a look-back study on a property owned for years, which reaches back to the original placed-in-service date through a catch-up deduction instead of a fresh, same-year classification.

Both tiers work the same way on a new build

Whether an owner engages a full engineered study or a budget engineered study, both tiers deliver the same 70-page engineered report, aligned with the IRS's own Audit Techniques Guide. On new construction, the choice between tiers usually comes down to the complexity of the job cost records rather than the property type; a straightforward build with clean, well-organized draws can often move through the budget tier just as thoroughly as a more complex project moves through the full tier.

Frequently asked questions

Do I need cost segregation if I built the property myself?

Yes, self-developed and owner-built properties qualify the same as a purchase. The classification work is the same; the advantage is that a self-developer usually has the most complete job cost records of anyone, itemized by trade, which makes the engineering classification faster and more precise.

How soon after construction should I order a study?

Any time after the building is placed in service. Earlier is easier only because the itemized job cost ledger is still intact and has not been rolled into one lump balance sheet number yet. There is no deadline that expires for new construction the way there is for a partial asset disposition election.

Does new construction cost segregation use Form 3115?

No. Form 3115 and the section 481(a) catch-up apply to look-back studies on property owned for years. A new construction study is a same-year classification with no missed depreciation to catch up on, so no automatic accounting method change is needed.

Are site improvements really bigger on new construction?

Often, yes, because a ground-up build typically includes a full paving, landscaping, fencing, and lighting package in the original job cost, all 15-year land improvement property, while a purchased building usually inherits older site work that was built and partly depreciated years earlier.

Can a study happen before the certificate of occupancy is issued?

The engineering team can begin reviewing cost records once they exist, but the property has to actually be placed in service, generally when it is ready and available for its intended use, before depreciation and the reclassified deductions actually start.