This article is for educational purposes only and is not legal or tax advice. Opportunity Zone, depreciation and cost segregation results depend on project facts, ownership documents and placed-in-service dates, so confirm the treatment with your tax advisor.
For an architect or engineer designing a Qualified Opportunity Zone substantial-improvement scope, cost segregation is not just a tax study that happens after construction. Cost segregation can change how the owner sees your drawings, alternates, allowances and value-engineering log because the same scope that helps satisfy IRC §1400Z-2(d)(2)(D)(ii) may also create shorter-life depreciable property under IRC §168.
The A/E opportunity is to design a substantial-improvement package that separates nondepreciable land, long-life structure, qualified improvement property, site improvements and tangible personal property before pricing gets locked. When cost segregation is considered during schematic design, the owner can ask better questions about whether dollars are helping the IRC §1400Z-2 substantial-improvement test, accelerating depreciation under IRC §168(k) as amended by OBBBA 2025, or merely increasing a nondepreciable land value that does not help either goal.
What substantial-improvement decision does the A/E team actually control?
The A/E team controls how the scope is described, sequenced and documented, while the tax owner controls the final classification under IRC §1400Z-2 and IRC §168. Under IRC §1400Z-2(d)(2)(D)(ii), tangible property used in a Qualified Opportunity Zone business is treated as substantially improved when additions to basis in the building during the applicable improvement period exceed an amount equal to the adjusted basis of the building at the beginning of that period, and Treas. Reg. §1.1400Z2(d)-2(b)(4)(i) identifies the substantial-improvement period as thirty months.
That rule makes the land/building split central to the A/E scope. Land is not depreciable under IRC §167 and is not the building basis that must be doubled for the substantial-improvement rule under Treas. Reg. §1.1400Z2(d)-2(b)(4), so a site-heavy redesign may create great civil drawings without moving the building test as much as the owner expects. A cost segregation review during design can help the owner see which improvements are building improvements, which are land improvements and which are removable assets or equipment.
For example, using the owner’s acquisition allocation as the source, a project with a building basis of $4,000,000 excluding land must add more than $4,000,000 to the building within the substantial-improvement period described in Treas. Reg. §1.1400Z2(d)-2(b)(4)(i). Using the A/E concept estimate as the source, a $5,200,000 renovation budget may look comfortable until $900,000 of civil site work and $400,000 of tenant-owned equipment are separated from the building-improvement pool under IRC §168 classifications.
Design takeaway: the drawings should let the owner trace which alternates improve the building for IRC §1400Z-2 and which alternates create shorter-life depreciation categories for IRC §168.
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How does an A/E substantial-improvement scope change depreciation timing?
An A/E substantial-improvement scope changes depreciation timing when the drawings and cost records allow a cost segregation study to reclassify portions of the construction cost from long-life building property into shorter-life property. Under IRC §168(e), many building components remain nonresidential real property or residential rental property, while certain assets may fall into shorter recovery classes such as five-year property, seven-year property or fifteen-year land improvements when the facts support that treatment.
That timing matters because IRC §168(k), as amended by OBBBA 2025, allows one hundred percent bonus depreciation for qualified property acquired after January 19, 2025, when the other statutory requirements for qualified property are met. For qualified property acquired on or before January 19, 2025, the TCJA phase-down rules under IRC §168(k) continue to control the available bonus depreciation percentage in the applicable placed-in-service year, and because IRS Notice 2026-11 ties “acquired” to the written binding contract date rather than the closing date, the contract, placed-in-service and acquisition records should be retained in the same file as the drawings.
Cost segregation is where the A/E file becomes tax evidence. Finish schedules, electrical one-lines, plumbing risers, kitchen equipment layouts, millwork details, site lighting plans and specialty HVAC narratives can all help the cost segregation provider understand function. A short note in the specifications explaining that a dedicated electrical feed serves production equipment, a restaurant hood, a medical imaging room or a data closet may be more useful than a lump-sum contractor invoice that simply says “electrical.”
The substantial-improvement calculation and the depreciation calculation are related, but they are not identical. Under IRC §1400Z-2(d)(2)(D)(ii), the owner is trying to show enough additions to the building basis during the substantial-improvement period; under IRC §168, the owner is trying to classify each asset placed in service into the correct recovery period. A cost segregation study can therefore help the owner both count the right dollars for the Opportunity Zone improvement plan and depreciate the right dollars at the right speed.
If the owner holds the Qualified Opportunity Fund investment for at least ten years under IRC §1400Z-2(c), a later election to step up basis to fair market value may exclude certain appreciation on the qualifying investment, but the project still needs correct depreciation classifications during the operating years. Depreciation deductions reduce taxable income while the property is operating, and cost segregation can affect partner capital accounts, debt sizing conversations and the timing of taxable income allocations before any long-term exit.
Which drawing details make cost segregation easier before the project is priced?
The best A/E contribution is not a tax conclusion; it is clear design data. A cost segregation team can do more with plans that separate building shell, tenant improvements, site improvements, equipment pads, process piping, decorative lighting, specialty power, flooring types, signage, security systems and exterior improvements than with plans that bury everything in one renovation allowance.
On an adaptive reuse project, the architect can separate demolition, structural repair, envelope work, interior partitions, restrooms, common-area finishes, tenant-specific buildouts and furniture-related infrastructure. On an engineering-heavy project, the engineers can separate general building HVAC from specialty exhaust, domestic plumbing from process plumbing, and life-safety electrical from equipment-serving electrical. Those separations help cost segregation professionals allocate costs between IRC §1250 real property and IRC §1245 personal property when the facts support that split.
Architects and engineers should also keep alternates traceable. If an owner asks whether to add a rooftop amenity, upgrade the parking field, install dedicated tenant equipment feeds or replace the full curtain wall, the cost segregation and Opportunity Zone effects may differ. The curtain wall may be central to the building improvement requirement under IRC §1400Z-2, while the parking field may be a fifteen-year land improvement under IRC §168(e) and may not count the same way toward the building-basis doubling test.
A practical design-stage checklist should include these items:
- Separate land, building, site improvement and equipment allowances in the A/E estimate, using the owner’s acquisition allocation and the A/E estimate as the named sources for the amounts.
- Tag tenant-specific systems in drawings so a later cost segregation study can distinguish general building service from asset-specific service.
- Keep change orders tied to drawing references so the owner can map additions to the substantial-improvement period under Treas. Reg. §1.1400Z2(d)-2(b)(4)(i).
- Identify qualified improvement property candidates because IRC §168(e)(6) defines qualified improvement property by reference to improvements to the interior of nonresidential real property after the building was first placed in service.
- Coordinate with the owner’s tax advisor before final GMP pricing because IRC §168(k), as amended by OBBBA 2025, can make bonus depreciation timing material for qualified property acquired after January 19, 2025.
When can value engineering hurt the OZ improvement test while helping depreciation?
Value engineering can hurt the Opportunity Zone improvement test when it removes building-basis additions needed for IRC §1400Z-2(d)(2)(D)(ii) and replaces them with site work, equipment or owner-furnished items that do not increase the same building basis. In the same sentence, value engineering can help depreciation when it shifts costs into shorter-life property that qualifies under IRC §168 and, for qualified property acquired after January 19, 2025, may qualify for one hundred percent bonus depreciation under IRC §168(k) as amended by OBBBA 2025.
That tradeoff is exactly why architects and engineers should not treat the tax model as a black box. The owner may need a minimum level of building additions for the substantial-improvement rule, while also wanting more five-year, seven-year or fifteen-year property for faster deductions. A cost segregation discussion before final pricing lets the owner see whether an alternate is solving the right problem.
Using the A/E value-engineering log as the source, a $600,000 reduction to structural upgrades may save cash but may also reduce building additions counted for IRC §1400Z-2(d)(2)(D)(ii). Using the same A/E value-engineering log as the source, a $600,000 specialty equipment infrastructure package may improve early depreciation under IRC §168, but it may not replace the removed building-basis additions for the substantial-improvement test.
For architects and engineers, the safest workflow is to show both columns: “building improvement for substantial-improvement modeling” and “potential shorter-life property for cost segregation review.” That does not require the A/E team to give tax advice. It requires the A/E team to provide clean scope descriptions so the owner’s tax advisor can apply IRC §1400Z-2, IRC §168, IRC §1245 and IRC §1250 to the actual project.
How should the A/E team coordinate with the owner’s cost segregation provider?
The A/E team should coordinate early enough that the cost segregation provider can read design intent before invoices flatten the scope. A provider from the best cost segregation companies will usually ask for drawings, specifications, contractor schedules of values, change orders, pay applications, equipment lists and placed-in-service information because the final study depends on both design and accounting records.
ClickDrag Finance’s Opportunity Zone cost segregation work often starts by reconciling the owner’s OZ timeline with the construction schedule. IRC §1400Z-2 is a permanent Opportunity Zone framework under OBBBA 2025, with the new tract designations effective for gains invested on or after January 1, 2027 and the existing map governing gains invested on or before December 31, 2026, and the project still needs to satisfy the applicable Qualified Opportunity Zone business property requirements when the owner relies on that statute. The architect’s role is to make the scope legible, not to decide the tax answer.
The A/E team should also ask whether the project is tracking placed-in-service dates by phase. Under IRC §168, depreciation generally begins when an asset is placed in service, and under IRC §168(k) as amended by OBBBA 2025, bonus depreciation depends in part on acquisition and placed-in-service requirements. If the project opens floors, tenant areas or site improvements in phases, cost segregation may need phase-level support rather than one final closeout package.
When prior-year depreciation was missed or misclassified, Rev. Proc. 2015-13 may be relevant because it provides procedural rules for accounting method changes, including certain depreciation method changes. That is a tax-advisor issue, but the A/E archive can still matter because old drawings and specifications may support a later cost segregation catch-up analysis.
Before the construction set is issued, the owner can also use ClickDrag’s qualifier to start a project-level conversation about whether an Opportunity Zone cost segregation study is worth modeling. The most useful A/E deliverable is a scope that helps the owner answer three questions: what counts toward substantial improvement under IRC §1400Z-2, what can be depreciated faster under IRC §168, and what could be subject to recapture under IRC §1245 or IRC §1250 if the owner sells before a long-term OZ exit.
Does the ten-year OZ exclusion cover depreciation recapture?
The ten-year OZ exclusion may reduce or eliminate gain recognized on a qualifying QOF investment when the taxpayer makes the election under IRC §1400Z-2(c) after the required holding period, but the result depends on the asset sale, interest sale and regulatory structure used at exit. Depreciation recapture concepts still matter because IRC §1245 recaptures depreciation on reclassified personal property as ordinary income, while depreciation on real property — including 15-year land improvements, which are §1250 property — generally produces unrecaptured §1250 gain taxed at up to 25% rather than §1250 ordinary recapture.
For an architect or engineer, the recapture point affects design documentation because cost segregation may move dollars from IRC §1250 real property into IRC §1245 property. That can create faster deductions during operations, especially when IRC §168(k) bonus depreciation applies to qualified property acquired after January 19, 2025, but it also changes the character of potential gain if the project is sold before the owner qualifies for the IRC §1400Z-2(c) ten-year basis election.
This is not a reason to avoid cost segregation. It is a reason to model timing. If the owner’s business plan is a long-term Opportunity Zone hold, the value of accelerated depreciation may fit the strategy. If the owner’s business plan includes a sale before the IRC §1400Z-2(c) ten-year holding period is reached, the tax advisor should model IRC §1245 and IRC §1250 consequences before the owner relies on early deductions.
Frequently Asked Questions
Should an architect design differently when the owner plans an Opportunity Zone cost segregation study?
Yes, the architect should design with clearer cost categories when the owner plans an Opportunity Zone cost segregation study. The architect does not make the tax classification, but separate details for shell, interiors, site work, equipment and tenant-specific systems make the IRC §1400Z-2 and IRC §168 analysis easier.
Does cost segregation help the substantial-improvement test?
Cost segregation helps the substantial-improvement test by clarifying which costs are building additions and which costs are land, site work or equipment. Under IRC §1400Z-2(d)(2)(D)(ii) and Treas. Reg. §1.1400Z2(d)-2(b)(4), the owner needs to measure building-basis additions during the required improvement period.
Can depreciation be accelerated on an OZ renovation designed by the A/E team?
Yes, depreciation can be accelerated when the renovation includes assets that qualify for shorter recovery periods under IRC §168. For qualified property acquired after January 19, 2025, IRC §168(k) as amended by OBBBA 2025 may allow one hundred percent bonus depreciation when the statutory requirements are met.
Why do land improvements matter in an Opportunity Zone cost segregation study?
Land improvements matter because they may produce faster depreciation without increasing the building basis in the same way for the substantial-improvement test. Under IRC §168(e), some land improvements may be fifteen-year property, while land itself remains nondepreciable under IRC §167.
What records should the engineer keep for depreciation support?
The engineer should keep drawings, specifications, equipment schedules, system narratives, change orders and pay-application detail for depreciation support. Those records help a cost segregation provider distinguish general building systems from asset-specific systems under IRC §168, IRC §1245 and IRC §1250.