Illustrative Property With Limited Records
What a study can still do when invoices are gone: inspection, drawings, and cited unit-cost estimates reconciled to basis. Educational information, not tax advice.
Educational information, not tax advice.
Updated 2026-10-14
Assumptions
- Educational information, not tax advice.
- Assume a 1998 retail box bought with a survey and no construction file. Original contractor invoices are gone.
- Assume a reasonable land value is assigned first. This page does not pick a land percentage.
- If a written §1060 allocation exists, Peco Foods is a risk to read before estimating a different split. It is not assumed to apply to every purchase.
- Any dollar figures below are invented for arithmetic only. They are not a typical mix and not a client result.
Key takeaways
- The audit guide’s cost-estimate approach exists for this fact pattern: same steps as a cost-records study, with cited unit costs instead of invoices.
- Cite the cost book (volume, page, item) and use it consistently. Mixing techniques can skew results toward short-life property.
- Boddie-Noell is the caution against unsupported numbers. Rule-of-thumb “20% personal property” is not used.
- If the estimate cannot be tied to observed quantities, the illustration stops rather than inventing a schedule.
A 1998 retail box is bought with a survey and no construction file. The study inspects, measures, photographs, and applies a published unit-cost source to quantities, then scales the result to the purchase price less land only in the limited sense of reconciling — not by applying a silent uniform step-up the audit guide rejects. Suppose, for arithmetic only, a $3 million purchase with $600,000 assigned to land. Invented depreciable basis is $2.4 million. No personal-property share is claimed.
Rule-of-thumb “20% personal property” is not used. The audit guide ranks that method last and says examiners should view it with caution. If the estimate cannot be tied to observed quantities, the illustration stops rather than inventing a schedule.
Order of operations does not change because invoices are missing. Land first. Building class (here, 39-year retail). Site work. Personal-property candidates from the retail matrix and inspection. Then a documented estimate. Then reconciliation. Then the CPA’s Form 4562. Missing records lower the quality of the cost evidence; they do not license a percentage pulled from another city.
Reviewer view
An examiner can re-measure a parking lot. An examiner cannot test a percentage pulled from another city. Publication 5653 describes the detailed engineering cost-estimate approach for acquisitions: a field inspection is recommended for all quality studies; estimates come from contractors or reliable published sources (the guide names R. S. Means and Marshall Valuation Service as examples), with volume, page, and item cited and consistent techniques. Replacement cost new less depreciation of improvements should approximate purchase price less land fair market value.
Those published databases are estimating tools, not tax authority. The guide’s own examination chapter shows a database estimate overstating outlet cost against actual contractor unit cost. Any estimate still needs applicable indirect costs. CostSeg SI does not claim an operational RSMeans agent, an accuracy rate, or a time-saving figure.
What the six approaches imply here
The ATG lists six approaches: detailed engineering from actual cost records; detailed engineering cost estimates; survey or letter; residual estimation; sampling or modeling; and rule of thumb. Actual cost records are generally the most methodical and are mainly available for new construction. This purchase cannot use that path. Residual estimation — costing only short-lived items and dumping the rest into the building — is simpler and can be less accurate, and it generally does not reconcile. Sampling from other stores is unreliable if the data are not from this project. Rule of thumb is last.
A contractor survey can be reasonably reliable with actual project data and unreliable if the numbers come from other jobs. Totals must not exceed actual project cost — here, the invented $2.4 million depreciable basis.
Boddie-Noell and substantiation
In Boddie-Noell Enterprises, Inc. v. United States, the Court of Federal Claims found percentage estimates and after-the-fact extrapolations far too unreliable to support the claimed classifications. The ATG notes that Boddie-Noell’s approach to structural-component lists is limited to that forum. The reliability lesson still matters: a schedule without quantities, photographs, and a cited cost source is the fact pattern an examiner can dismantle.
Classification must be substantiated. The ATG cites older rulings for the point that the determination is factually intensive and must be supported by corroborating evidence. Substantiation using actual costs is more accurate than using estimates. Estimates are what this file has.
Inspection checklist on a dark file
Walk the sales floor, stockroom, restrooms, roof, and lot. Photograph floor covering (strippable or ceramic), fixtures that conveyed, lighting types, and paving. Measure the lot. Interview the manager about what was replaced after 1998. The survey helps with land area; it does not classify millwork. Drawings, if a later tenant improvement set exists, propose quantities; inspection confirms what is still there.
Read the purchase agreement. If a written §1060 allocation exists, Peco Foods can bind the buyer; the ATG says the reach beyond §1060 is unclear. Do not estimate a different split that contradicts a writing. Not every retail closing contains one.
Reconciliation without a forbidden step-up
The ATG treats applying a pro-rata step-up factor to estimates to force reconciliation to purchase price as not an acceptable method. If the first takeoff, priced from a cost manual, comes in above or below the invented $2.4 million, the report should explain condition, location, and missing items — and disclose any scaling of depreciable lines that is used, without scaling land and without scaling a vendor invoice that already is actual cost. See the cost-estimation-and-reconciliation illustration.
The CPA files Form 4562. Used-property bonus, if any, follows Notice 2026-11. 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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