Why new construction is ideal for cost segregation
When you buy an existing building, the cost segregation engineer must allocate a single purchase price among land, building, and components using appraisal techniques, comparable cost databases, and unit-cost estimates. On a new construction project, the construction draw records itemize every cost: foundation, framing, electrical, plumbing, finishes, and site work. This documentation allows more precise classification with less estimation.
The result: cost seg studies on new construction typically identify a higher percentage of qualifying shorter-life assets than studies on acquired buildings, because there is no need to back-allocate from a lump-sum price.
What gets reclassified in a commercial build
In a typical new commercial building, cost segregation can identify: 5-year personal property (carpeting, certain flooring, removable fixtures, specialized equipment); 7-year personal property (office furniture and fixtures); and 15-year land improvements (parking lots, sidewalks, landscaping, fencing, exterior lighting). In residential rentals, 15-year land improvements are the main accelerant. With 100% bonus depreciation available for property with a 20-year or shorter MACRS life, all of these components can be expensed in year one.
Timing: do the study before filing
A cost seg study on a new construction project should be completed and reviewed before you file your first-year tax return. If you miss the first-year return, you can use Form 3115 (change in accounting method) to catch up the missed depreciation in a subsequent year, but it adds complexity. Engaging the engineer during or shortly after construction completion minimizes this risk.
Frequently asked questions
Is cost segregation only for acquisitions, or does it work for new builds?
It works for both, and often provides more precise results on new builds because all costs are itemized in construction records.
How much of a new building's cost can be reclassified?
It varies by building type and design, but residential rentals typically see 10–20% of depreciable basis reclassified; commercial buildings 15–30%. A cost segregation engineer will provide a range before completing the study.
Can I use bonus depreciation on reclassified new construction components?
Yes. Property with a MACRS life of 20 years or less — including the 5-, 7-, and 15-year components identified by cost segregation — qualifies for 100% bonus depreciation for qualifying property placed in service after January 19, 2025.
Sources
Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.