The best time to plant a tree was twenty years ago. The next best time is now.
The same principle applies to cost segregation. Property owners should consider a study as soon as they begin planning a new construction project.
Early involvement allows the cost segregation team to collect detailed information throughout construction. As a result, the final study can identify more qualifying assets and support each classification with stronger documentation.
Why Timing Matters More Than Ever
The One Big Beautiful Bill Act permanently reinstated 100% bonus depreciation for qualifying assets acquired after January 19, 2025.
Therefore, owners may immediately deduct eligible assets classified as 5-, 7-, or 15-year property. However, not every component of a building qualifies for bonus depreciation.
A cost segregation study identifies building costs that may qualify as personal property or land improvements. The study then assigns those costs to the appropriate recovery periods.
Starting during construction helps the engineering team identify those assets accurately. It also gives owners and their CPAs more time to coordinate their tax strategy.
What You Could Lose by Waiting
New construction cost segregation studies often identify 15% to 25% or more of project costs as 5-, 7-, or 15-year assets. In comparison, studies of existing properties often identify approximately 10% to 20%.
Consider two developers with properties valued at $8 million.
The first developer plans and constructs a new commercial property. The second purchases an existing building with comparable features.
The first developer may reclassify 15% to 25% or more of the project costs. Meanwhile, the second may reclassify only 10% to 20%.
That difference could equal $400,000 in assets eligible for shorter recovery periods. If those assets qualify for 100% bonus depreciation, the first developer may deduct them in the first year.
At a 37% tax rate, the additional deduction could generate $148,000 in first-year tax savings. The developer could then use that cash to reduce debt or invest in another income-producing asset.
Four Advantages of Starting During Construction
1. More Accurate Cost Data
A planned construction project gives the engineering team access to detailed financial records. These records may include invoices, pay applications, change orders, supplier quotes, and material takeoffs.
Consequently, the team can see exactly what contractors installed and how much each component cost. Examples may include:
- HVAC equipment
- Electrical systems
- Special-purpose millwork
- Decorative paving
- Security systems
- Specialty plumbing
- Landscaping
- Exterior lighting
This information helps the team assign each asset to the correct Modified Accelerated Cost Recovery System, or MACRS, category.
For example, a dedicated electrical circuit may support a piece of special-purpose millwork. Without detailed records, someone might classify the circuit as part of the building.
However, the circuit may qualify as an integral component of the 7-year millwork. A properly documented study can identify that relationship and assign the cost more accurately.
2. Higher Reclassification Percentages
New construction studies often produce higher reclassification percentages because the team can review primary cost records.
AIA applications for payment, contractor cost breakdowns, supplier invoices, and material takeoffs reveal the individual parts of a project. Therefore, engineers can identify assets that might remain hidden in a general construction estimate.
Detailed records also reduce reliance on broad allocation methods. This gives the study team a better opportunity to capture all qualifying assets.
3. Stronger, IRS-Defensible Documentation
Detailed construction records create a clear connection between each asset and its actual cost.
If the IRS reviews the study, invoices and pay applications can help support the classifications. They also show how the engineering team calculated each amount.
After the property enters service, project documents often become scattered across contractor inboxes and internal systems. Team members may also leave, and contractors may archive old records.
Waiting can make those documents difficult to locate. In turn, missing records may lead to weaker estimates and overlooked deductions.
4. A Simultaneous Section 179D Opportunity
Commercial property owners may also qualify for a Section 179D deduction. This deduction applies to certain energy-efficient lighting, HVAC, and building envelope systems.
Section 179D requires specialized analysis and certification. However, owners can often coordinate that work with a cost segregation study.
Planning during the design and construction phases offers another advantage. The project team may identify potential energy-efficiency improvements before installation. That approach can help owners avoid expensive retrofits later.
Example: An $8 Million Mixed-Use Development
Suppose you develop an $8 million commercial property. For simplicity, assume the entire amount represents depreciable basis and excludes land.
Under a standard 39-year depreciation schedule, the property could generate approximately $205,000 in annual depreciation deductions. At a 37% tax rate, that deduction could produce about $76,000 in annual tax savings.
Now assume a cost segregation study reclassifies 22% of the property into 5-, 7-, and 15-year categories. That portion equals $1.76 million.
If those assets qualify for 100% bonus depreciation, you may deduct the full $1.76 million in the first year. After adding the first-year depreciation from the remaining 39-year property, the total deduction could reach approximately $1.95 million.
At a 37% tax rate, that deduction could generate about $722,000 in first-year tax savings. That represents more than $646,000 in additional first-year savings compared with the standard approach.
You could use that cash to pay down a construction loan, fund another development, improve working capital, or reinvest in your business.
Cost segregation does not create a tax loophole. Instead, it helps property owners claim depreciation deductions under the tax rules that apply to different building components.
Your New Construction Cost Segregation Checklist
A few practical steps can make the study more efficient and accurate.
Hire a Cost Segregation Firm Early
Bring an experienced firm into the project during planning or construction. The team can explain which documents to collect and how contractors should organize cost information.
Preserve Detailed Records
Save all documents that establish project costs, including:
- Contractor invoices
- Supplier invoices
- AIA applications for payment
- Change orders
- Material takeoffs
- Detailed labor and material breakdowns
- Equipment schedules
- Construction drawings
- Final project specifications
Primary records usually provide stronger support than estimates prepared after construction.
Organize Costs by Building System
Ask contractors to separate costs by system whenever possible. Useful categories may include electrical, plumbing, HVAC, flooring, millwork, landscaping, paving, security, and specialty equipment.
Clear cost breakdowns help the study team identify assets and assign accurate values.
Confirm the Placed-in-Service Date
The placed-in-service date affects the depreciation rules that apply to the project. Coordinate this date with your CPA and cost segregation firm.
Do not assume that the construction completion date automatically determines when the property enters service. Your tax advisor can evaluate the specific facts.
Evaluate Section 179D During Design
Review the planned lighting, HVAC, and building envelope systems before construction ends. Early analysis may reveal opportunities to qualify for a Section 179D deduction without adding costly upgrades later.
Why Primary Documentation Matters
The main purpose of a cost segregation study is to identify building components that qualify as personal property or land improvements. Those categories generally receive shorter depreciation periods than the building itself.
A study completed years after construction may rely more heavily on estimates. The engineering team may need to calculate costs using plans, industry databases, or replacement-cost methods.
Those methods can still produce a valid study. However, actual invoices and cost records usually provide more precise results.
During construction, the team can trace costs directly to specific assets. This creates a clearer audit trail and strengthens the final report.
Ask your contractors to provide detailed breakdowns throughout the project. The more information they supply, the easier it becomes to identify qualifying assets and document their costs.
Is the Study Worth the Cost?
Commercial cost segregation studies often cost between $5,000 and $15,000. The final fee depends on the property’s size, type, complexity, and available records.
For many new construction projects, the first-year tax savings can significantly exceed the study fee. However, each property produces different results.
Your tax rate, depreciable basis, asset classifications, placed-in-service date, and business use will affect the final benefit.
A qualified provider can estimate the potential savings before beginning a full study. Your CPA can then evaluate how those deductions fit within your broader tax strategy.
The Bottom Line
The best time to plan a cost segregation study is during construction.
Early planning gives the engineering team access to actual costs, detailed records, and project specifications. It may also increase the percentage of costs assigned to shorter recovery periods.
Just as importantly, strong documentation makes the final study more defensible. It also reduces the risk of missing valuable deductions.
If you are planning a new construction project, talk with your CPA and an experienced cost segregation firm as early as possible. Coordinating the study from the beginning can turn depreciation into immediate cash flow.
Frequently Asked Questions
Why should a developer conduct a cost segregation study during construction?
Starting during construction allows the study team to collect detailed cost data as contractors complete the work. This reduces reliance on estimates and creates a stronger audit trail.
Early planning may also help the team identify more qualifying 5-, 7-, and 15-year assets. As a result, the owner may receive larger accelerated depreciation deductions.
Can I complete a cost segregation study after construction?
Yes. Property owners can complete a study after construction or even several years later.
However, the study team may need to rely on estimates if invoices and contractor records are unavailable. Starting earlier usually provides more accurate cost information.
What documents should I keep?
Preserve invoices, AIA pay applications, change orders, material takeoffs, construction drawings, equipment schedules, and contractor cost breakdowns.
You should also organize the records by building system whenever possible.
Does every short-life asset qualify for 100% bonus depreciation?
No. Eligibility depends on several factors. These include the property type, business use, acquisition date, placed-in-service date, and applicable tax rules.
Under the OBBBA rules referenced in this article, certain short-life assets acquired after January 19, 2025, may qualify for 100% bonus depreciation. Consult your CPA to confirm eligibility.
Can I combine a cost segregation study with a Section 179D analysis?
Yes. Coordinating the two studies may help you identify both accelerated depreciation and energy-efficiency deductions.
Ideally, begin the Section 179D review during the design phase. Early planning gives the project team time to evaluate qualifying systems before construction ends.
