Illustrative New Construction Project
How a study uses AIA pay applications to map dollars to components when the building is being finished. Educational information, not tax advice.
Educational information, not tax advice.
Updated 2026-10-14
Assumptions
- Educational information, not tax advice.
- Assume a mixed-use shell delivered by a developer, with monthly AIA pay applications, drawings, and change orders available.
- Assume retail may open months before apartments, so more than one placed-in-service date is possible.
- Any dollar figures below are invented for arithmetic only. They are not a typical mix and not a client result.
Key takeaways
- Actual cost records are the audit guide’s preferred approach — generally the most methodical and accurate, and mainly available for new construction.
- Change orders must be included or the reconciliation fails.
- Placed-in-service may be phased. Bonus-depreciation acquisition dates are a separate test under Notice 2026-11.
- Soft costs and interest capitalized under §263A, if any, have to ride along in the same totals. This page does not compute §263A.
A developer delivers a mixed-use shell. Monthly pay applications list concrete, millwork, electrical, and site work. The study assigns those lines to recovery classes using drawings and inspections, then proves the sum equals capitalized basis. Suppose, for arithmetic only, total capitalized project cost of $20 million with $3 million assigned to land. Invented depreciable basis is $17 million. No class mix is claimed.
Soft costs and interest that were capitalized under §263A, if any, have to ride along in the same totals. This page does not compute §263A. The audit guide lists consideration of related aspects — including §263A, accounting-method change, and sampling — as a principal element of a quality study.
Order of operations on a live job: substantiate total cost from the job ledger; remove land; inspect as work finishes; review drawings, specs, contracts, G702/G703 pay applications, and change orders; assign classes; take off quantities where a CSI line is mixed; allocate indirects on a stated method; group assets; reconcile. That sequence follows the ATG’s detailed-engineering-from-actual-cost-records steps without pretending the IRS prescribed a form.
Timing
If retail opens months before apartments, there may be more than one placed-in-service date. Publication 946 says depreciation begins when property is ready and available for its intended use. Publication 527 applies that idea to rentals: ready and available for rent. A certificate of occupancy for the grocery pad in March and for the apartments in November is two dates, not one.
Bonus-depreciation acquisition dates are a separate test. Self-constructed property is generally treated as acquired when physical work of a significant nature begins. A safe harbor treats that as the date more than 10% of total cost, excluding land and preliminary activities, has been paid or incurred. Notice 2026-11 provides interim guidance after Public Law 119-21. A project begun under a binding contract before January 20, 2025 can remain on the phase-down even if it opens later. The study records dates. The CPA applies the rate. This page does not compute tax.
Pay applications are not recovery classes
A CSI division is not a MACRS class. “Division 26 Electrical” can include service, house lighting, and dedicated equipment circuits. Drawings and a panel directory are used to split those dollars before any class is assigned. Only after the split does the study call dedicated equipment circuits personal property and house lighting building, following the relevant matrix as a map and Treas. Reg. §1.48-1 as the definition.
Change orders that stay bundled have to be allocated on a stated method. Unbundling is an estimate. The report should say so. False precision is worse than a documented allocation. See the bundled-contractor-costs illustration.
Building classes on a mixed-use ticket
Dwelling floors that meet the 80% test are generally 27.5-year residential rental property. Ground-floor retail is 39-year nonresidential. If one building mixes uses, the income test is applied to that building. Getting 27.5 versus 39 wrong swamps any millwork adjustment. Site work serving the campus is typically 15-year land improvements; a shared parking structure is a building.
Interior retail work the developer places in service may be QIP if §168(e)(6) is met, or it may be part of the original building if it is the first finish. That distinction is statutory, not a study-brand choice.
Quality elements examiners look for
Publication 5653 lists thirteen principal elements of a quality study, including preparation by someone with expertise, a detailed description of methodology, appropriate documentation, interviews, common nomenclature, a standard numbering system, legal analysis, unit costs and take-offs, asset grouping, reconciliation to actual costs, treatment of indirects, identification of §1245 property, and related aspects such as §263A. It also lists nine elements of a quality report. The IRS has not established required qualifications or a standard format. Do not call the study “IRS-approved.”
CostSeg SI describes extraction of pay applications, estimation, QA, and engineer certification as a proposed Super Intelligence workflow. This illustration does not claim those agents are operational, does not cite performance figures, and does not claim engineer certification on this website.
Reconciliation and filing
Examiners compare study costs to AIA G-702/G-703 records. Totals must not exceed actual project cost. Mixing a detailed takeoff for short-lived items with a residual for the building can skew results toward §1245; the ATG warns about that. Use the same estimating technique for all items when estimates are needed at all.
The CPA files Form 4562 for each placed-in-service date and class. Educational information, not tax advice.
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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- 5IRS Publication 946 — How To Depreciate Property (2025)(opens in a new tab)
Appendix B reproduces the Rev. Proc. 87-56 class lives.
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