Cost Segregation for New Construction STRs: Why New Builds Have the Most to Gain
When it comes to cost segregation, new construction properties have a significant documentation advantage: you know exactly what was built and exactly what it cost. Every component can be traced to a contractor invoice, a subcontractor bid, or a change order — eliminating the estimation that's required when analyzing an existing building purchased from a third party.
The New Construction Documentation Advantage
In a typical cost segregation study for a purchased existing property, the engineer must estimate component costs using construction cost databases (e.g., RSMeans) and apply allocation percentages. For new construction, actual costs are available — which means:
- More precise component allocations (actual cost vs. estimated)
- Stronger audit trail — every classification is backed by a contractor invoice
- Higher reclassification accuracy — no estimation variance
- Easier to separate personal property, land improvements, and structural components
- QIP (Qualified Improvement Property) is identifiable from the build records
Before you do anything else: save all contractor invoices, subcontractor bids, and change orders from your build. These documents are the backbone of your cost segregation study. Digital copies in a cloud folder organized by trade category (electrical, plumbing, site work, finishes) are ideal.
Land Improvement Opportunities in New Construction
New construction STRs typically include significant site work — driveway, parking, landscaping, outdoor lighting, fencing, pools, and hardscaping. These are all 15-year land improvements eligible for 100% bonus depreciation. In a new build with a $200K site improvement budget, that's an immediate $200K deduction.
| New Build Component | Classification | Life | Typical Cost Range |
|---|---|---|---|
| Driveway / parking surface | 15-year land improvement | 15 years | $15K–$50K |
| Landscaping & irrigation | 15-year land improvement | 15 years | $20K–$80K |
| Outdoor lighting system | 15-year land improvement | 15 years | $8K–$30K |
| Pool & pool deck | 15-year land improvement | 15 years | $40K–$120K |
| Fencing / perimeter | 15-year land improvement | 15 years | $5K–$25K |
| Outdoor kitchen / fire pit | 15-year land improvement | 15 years | $15K–$60K |
| Interior personal property | 5-year personal property | 5 years | Varies |
| Appliances & fixtures | 5–7-year personal property | 5–7 years | Varies |
Timing: Place in Service = Start the Clock
The property is 'placed in service' when it's available for rental — not necessarily when it's first occupied by a guest. For bonus depreciation purposes, placement in service date matters: any qualified property placed in service after January 19, 2025 is eligible for 100% bonus depreciation under the OBBBA. Commission your cost segregation study in the same tax year you place the property in service.
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