Land Developer question

[lydia33]

I think I'm thinking right....Taxpayer has purchased land with a loan from bank. They are improving the property for resale. They are making a subdivision out of the land. They have paid to run utilities, making a road with culverts etc. The amounts for the land improvement will go to the cost of the property. What about the interest on the loan? Is it investment interest? They also have 2 of the lots sold in 07. Also have as expense land taxes and fees for LLC. It is a partnership LLC.

[RoyDaleOne]

Can you say not capital gain income.

Not investment property therefore not investment interest.

[OldJack]

Interest expense and probably everything else gets added to the cost basis of the land to be expensed at time of sale.

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[RoyDaleOne]

LAND DEVELOPER

In the industry, the developer is generally the owner of the development. The developer acquires the raw land, obtains approval for development, secures the financing, and begins to clear the land, install roads, utilities, etc. The land developer may also build the homes in the development, sell the lots to a builder that will build the homes, or a combination of both.

Income Recognition -- Applicable Method

Since land developers are involved in the production of property without contracts, they generally report their income from the sale of a parcel of property at the time of settlement/closing.

Cost Recognition

The direct costs incurred by a land developer in the development of real estate (including the original cost of the land, direct materials and direct labor) should be capitalized according to IRC sections 263(a) and 263A.

The uniform capitalization rules of IRC section 263A(a)(1) apply to land developers, and mandates certain costs to be allocated to property produced by the taxpayer as real property. These costs include pre-production costs (real estate taxes, zoning costs, design fees, etc.), production costs, and post-production costs.

IRC SECTION 263A(a)(1) In general. -- In the case of any property to which this section applies, any costs described in paragraph (2) shall be capitalized.

VON-LUSK v. COMMISSIONER, 104 T.C. 207 (1995) -- Predevelopment costs were capitalized per IRC section 263A because taxpayer was involved in the "production" of property.

The land developer must determine the accumulated production expenditures with respect to each unit of property per Treas. Reg. section 1.263A-11. Each unit of property, as defined in Treas. Reg. section 1.263A-10, is treated as a separate costing unit to which all direct and indirect costs described in section 263A(a) are required to be capitalized.

HOW ARE COSTS ALLOCATED TO EACH PARCEL OF PROPERTY?

Generally Accepted Accounting Principles (GAAP) establishes a hierarchy of cost allocation methods via SFAS 67 Paragraph 11. These methods (in order) are:

1. Specific identification method.

2. Relative value methods (appraised value, relative assessed value for real estate taxes)

3. Other allocation methods (square footage)

If the lots have the same general characteristics and size, cost can be allocated evenly to each lot. If the lots have similar characteristics but different sizes, cost can be allocated on square footage. If lots have different characteristics, costs can normally be allocated based on relative sales value.

In Homes by Ayres, 795 F.2d 832 (9th Cir. 1986), the court addressed job-costing methods:

"Taxpayers accounted for their construction costs by accumulating costs for each phase of a subdivision . . . taxpayers would accumulate all direct and indirect costs for the year and then allocate them according to one of three methods to determine the cost of the houses sold in each phase (relative sales value method, average cost method, and "square footage method"). . . . All three of these methods comport with generally accepted accounting principles and the IRS admits that they accurately reflect income."

Interest is required to be capitalized during the production period. Code Section 263A(f)(1). Interest may be deducted after the production period of the property ends (if the other requirements for a deduction are satisfied). Reg. Sections 1.263A-8(a), 1.263A-9(a), and 1.263A-12©.

This is a very specialized area many variables as to cost allocations, etc.

[lydia33]

That's what I thought, but you know who does not want to hear this. The taxpayer. I told them that all the expenses were going to have to be add to the cost basis. This seem to upset them so I told them that I would do some investigation to make sure I was right. Thanks I will look up the regs. and read up on them also. Does anyone know of any specific Pub. that might address this directly?

[RoyDaleOne]

See:

Market Segment Papers Construction Industry

263 regs.

Also

http://www.irs.gov/businesses/small/indust...d=97934,00.html

Also, can one say self employment tax for general partners?

[lydia33]

Yes!!!!!!! You and I and IRS can say that but they think they are going to have a loss......NOT Thanks for your help. :rolleyes: