New Construction Studies
For new buildings, a study can use actual construction cost records — the approach the IRS audit guide calls the most methodical and accurate. Indirect costs are allocated across components. Self-constructed property has its own bonus acquisition-date rules, including a 10% cost safe harbor.
Educational information, not tax advice.
Updated 2026-10-14
Key takeaways
- Construction contracts, pay applications, change orders, and drawings are the core records.
- Indirect costs such as design fees and permits are allocated across components.
- Self-constructed property has its own rules for when it is treated as acquired for bonus purposes.
- The detailed-cost approach is generally available only when contemporaneous records exist.
- Publication 5653 is examiner guidance, not a required construction-accounting format.
When an owner builds, the records exist to trace costs directly to components. The IRS audit guide describes the detailed engineering approach from actual cost records as generally the most methodical and accurate method, and notes it is mainly available for new construction.
Steps typically include substantiating total project cost, visiting the site, reviewing drawings, specifications, contracts, and AIA-style pay applications, taking quantities off the drawings, applying contractor unit costs, reconciling to total contractor cost, and allocating indirect costs.
The guide lists those steps as the detailed-cost approach. Other approaches — estimates, contractor surveys, residual methods, sampling, and rules of thumb — are described as less accurate or, in the last case, to be viewed with caution. They are derivatives when records are thin, not upgrades from actual cost.
Self-constructed property also has a bonus-depreciation acquisition-date rule that is different from a simple closing date. Construction is generally treated as acquired when physical work of a significant nature begins. Notice 2026-11 applies the existing regulation with the January 19, 2025 cutoff.
CostSeg SI’s proposed workflow is an explanatory description of how records could be organized. It is not a claim that extraction or engineer certification is operational. Educational information, not tax advice.
New construction is the setting where a study can be as good as the job-cost file. If the contractor already priced equipment wiring, site paving, and finishes as separate trades, the take-off is a reconciliation exercise. If those trades were billed as one lump sum, the study still has to unbundle them with quantities and a cited method.
Planning during construction
Engaging a study early can help a project team keep cost records in a form that separates components — for example, keeping equipment wiring, site work, and finishes as distinct line items. Before-and-after photographs of site work help support land versus improvement allocations.
AIA G-702 and G-703 style pay applications are the records examiners are told to compare to a study. Line items that already separate site work, equipment, and building trades make that comparison easier. A single “general conditions” or “allowance” line still has to be allocated; it is not a class by itself.
Change orders belong in the file. Work that was added, deleted, or repriced after the original contract can change both total basis and the unit costs used in the take-off.
Bonus depreciation for self-constructed property
For bonus purposes, self-constructed property is generally treated as acquired when construction begins. IRS guidance includes a safe harbor that treats construction as beginning when more than 10% of total cost has been paid or incurred. Notice 2026-11 provides interim guidance on applying these rules after the July 2025 law.
The 10% safe harbor excludes the cost of land and preliminary activities such as planning, designing, securing financing, exploring, or researching. Physical work of a significant nature is the general test; the percentage is a safe harbor, not the only way to begin.
A written binding contract for another person to manufacture or construct the property for the taxpayer is generally treated as self-constructed property under the regulation. Property is not treated as acquired after the date such a binding contract is entered into for purposes of the January 19, 2025 cutoff.
Capitalization rules
The uniform capitalization rules of §263A and interest capitalization can add costs to basis during construction. The audit guide lists §263A as a related aspect a quality study should consider.
Those capitalized amounts become part of depreciable basis and should be allocated with the other indirect costs. Leaving them off the study understates basis. Dumping them only onto the building understates the shorter classes.
This article does not restate the full §263A computation. Your CPA determines which construction-period costs are capitalized.
Reconciliation on a new project
Allocated component costs should add back to total contractor cost plus allocated indirects, and that total should match the project’s depreciable basis after land is removed.
If a published unit-cost database is used to fill a gap, the guide expects the source to be cited and the same technique to be used consistently. Mixing a detailed short-life take-off with a residual building number is the residual-estimation weakness the guide describes. Actual contractor unit costs, when they exist, remain the better source.
Components of a larger project
Notice 2026-11 allows a component election, using the existing regulation with substituted dates, so that components acquired or begun after January 19, 2025 of a larger project begun earlier can be tested separately for the 100% rate.
The election is made by attaching a statement to the return for the year the larger property is placed in service. Whether to make it is a CPA decision.
Sources
- 1IRS Publication 5653 — Cost Segregation Audit Techniques Guide (rev. 2-2025)(opens in a new tab)
Written for IRS examiners. The guide states it is not an official pronouncement of law and cannot be cited as authority. It predates the July 2025 law.
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